[Federal Register Volume 63, Number 79 (Friday, April 24, 1998)]
[Proposed Rules]
[Pages 20340-20359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10686]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / 
Proposed Rules  

[[Page 20340]]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 33

[Docket No. RM98-4-000]


Revised Filing Requirements (April 16, 1998)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to revise 18 CFR part 33 to update the filing requirements 
for applications under part 33, including public utility mergers. The 
Commission expects that, by providing applicants more detailed guidance 
for preparing applications, the proposed filing requirements will 
assist the Commission in determining whether applications under section 
203 of the Federal Power Act are consistent with the public interest 
and will provide more certainty and expedition in the Commission's 
handling of such applications.

DATES: Interested entities may file comments no later than August 24, 
1998.

ADDRESSES: File comments with the Office of the Secretary, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, D.C. 
20426.

FOR FURTHER INFORMATION CONTACT:
Kimberly D. Bose (Legal Matters) Office of the General Counsel, Federal 
Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C. 
20426, Telephone: (202) 208-2284
Wilbur Earley (Technical Matters) Office of Economic Policy, Federal 
Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C. 
20426, Telephone: (202) 208-0023
Michael A. Coleman (Technical Matters) Office of Electric Power 
Regulation, Federal Energy Regulatory Commission, 888 First Street, 
N.E., Washington, D.C. 20426, Telephone: (202) 208-1236

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission also provides all 
interested persons an opportunity to inspect or copy the contents of 
this document during normal business hours in the Commission's Public 
Reference Room, Room 2A, 888 First Street, N.E., Washington, D.C. 
20426. The complete text on diskette in WordPerfect format may be 
purchased from the Commission's copy contractor, La Dorn Systems 
Corporation. La Dorn Systems Corporation is located in the Public 
Reference Room at 888 First Street, N.E., Washington, D.C. 20426.
    The Commission Issuance Posting System (CIPS), an electronic 
bulletin board service, also provides access to the texts of formal 
documents issued by the Commission. CIPS is available at no charge to 
the user. CIPS can be accessed over the Internet by pointing your 
browser to the URL address: http://www.ferc.fed.us. Select the link to 
CIPS. CIPS also may be accessed using a personal computer with a modem 
by dialing (202) 208-1397 if dialing locally or 1-800-856-3920 if 
dialing long distance. To access CIPS, set your communications software 
to 19200, 14400, 12000, 9600, 7200, 4800, 2400 or 1200 bps, full 
duplex, no parity, 8 data bits, and 1 stop bit. The full text of this 
document will be available on CIPS in ASCII and WordPerfect 6.1 format. 
CIPS user assistance is available at (202) 208-2474.

I. Overview

    In this notice of proposed rulemaking (NOPR), the Federal Energy 
Regulatory Commission (Commission) is proposing to revise 18 CFR Part 
33 by specifying clear and succinct filing requirements for 
applications submitted pursuant to Sec. 203 of the Federal Power Act 
(FPA),1 including public utility mergers.2 
Following issuance of the Merger Policy Statement in 1996,3 
Sec. 203 applications have varied widely in the quantity and quality of 
information they have included, particularly with respect to 
competitive market power analyses and the supporting data. The proposed 
filing requirements address this problem by providing detailed guidance 
to applicants. This rulemaking proceeding is intended to provide 
greater certainty as to what is needed in Sec. 203 applications, 
thereby helping applicants to organize and prepare their applications 
more quickly and efficiently and also to better predict the outcome of 
the Commission's evaluation of their applications. In providing more 
certainty, the filing requirements are also intended to facilitate a 
prompt, procedurally efficient and substantively accurate decision 
making process by the Commission to ensure that mergers and other 
jurisdictional transactions under Sec. 203 are consistent with the 
public interest in rapidly changing electric power markets. In 
addition, the NOPR is intended to lessen regulatory burdens on the 
industry by eliminating outdated and unnecessary filing requirements, 
streamlining the filing requirements for mergers that do not raise 
competitive concerns, and proposing the use of a computer simulation 
model to facilitate a prompt and highly accurate method of market power 
analysis by both applicants and the Commission. The Commission expects 
that, by assisting the Commission and applicants in determining whether 
applications under Sec. 203 are consistent with the public interest and 
providing more certainty and expedition in applicants' preparation and 
the Commission's handling of such applications, the proposed filing 
requirements can lessen overall the regulatory burden associated with 
the Sec. 203 application process.
---------------------------------------------------------------------------

    \1\ 16 U.S.C. 824b.
    \2\ When the Commission refers to a ``merger'' in this document, 
it also includes ``consolidations.'' Section 203 of the FPA requires 
Commission authorization for mergers or consolidations involving the 
jurisdictional facilities of a public utility. It also requires 
Commission authorization for the sale, lease or other disposition of 
jurisdiction facilities with a value in excess of $50,000, and for 
the purchase by a public utility of the securities of another public 
utility.
    \3\ Inquiry Concerning the Commission's Merger Policy Under the 
Federal Power Act: Policy Statement, Order No. 592, FERC Stats. & 
Regs. para. 31,044 (1996), order on reconsideration, 78 FERC para. 
61,321 (1997) (Policy Statement).
---------------------------------------------------------------------------

    The Policy Statement set forth procedures, criteria and policies 
for evaluating proposed mergers. The Policy Statement set out the three 
factors the Commission will consider when analyzing a merger proposal: 
effect on competition; effect on rates; and effect on regulation. The 
Commission also stated its intention to issue a NOPR to set out 
specific filing

[[Page 20341]]

requirements consistent with the Policy Statement.4 That is 
the primary purpose of the NOPR we are issuing today.
---------------------------------------------------------------------------

    \4\ Policy Statement at 30,111 n.3.
---------------------------------------------------------------------------

    In the period since the issuance of the Policy Statement, the 
Commission has gained valuable experience evaluating various types of 
mergers using the guidelines in the Policy Statement as the framework 
for our analysis. We have acted on 15 significant merger applications 
since the Policy Statement was issued. Some of these were mergers of 
adjacent vertically-integrated electric companies. Others involved 
utilities that were not currently interconnected, but planned to 
integrate their electric systems post-merger. Yet others involved 
mergers of electric companies with natural gas companies. The 
Commission has devoted substantial resources to considering whether a 
proposed merger would significantly increase horizontal or vertical 
market power, thereby indicating potential competitive concerns. As we 
have gained experience in reviewing the issues related to competition 
presented by these mergers, we have fine-tuned the horizontal market 
power analysis set out in the Policy Statement and have adopted a 
vertical market power analysis.5 From this experience, we 
propose filing requirements that will enable all parties to more 
efficiently address the types of issues that have arisen in the 
applications filed since the issuance of the Policy Statement, as well 
as issues that will undoubtedly arise as the industry continues to make 
the transition to a more competitive marketplace.
---------------------------------------------------------------------------

    \5\ See, Enova Corporation and Pacific Enterprises, 79 FERC 
para. 61,372 (1997) (Enova).
---------------------------------------------------------------------------

    Specifically, the NOPR addresses five areas of merger policy and 
the processing of applications: (1) it reaffirms the Commission's 
horizontal market power analysis and proposes specific filing 
requirements for horizontal mergers consistent with the Policy 
Statement's Appendix A analysis; \6\ (2) it proposes a vertical market 
power analysis and accompanying filing requirements for mergers that 
raise vertical market power concerns that are consistent with our 
existing approach to examining vertical mergers; \7\ (3) it proposes 
streamlined filing requirements and lesser information burden for 
mergers that raise no competitive concerns; (4) it sets out a specific 
computer simulation model for debate and discussion, and asks for 
industry comment on this particular model and on the use of modeling in 
general; and (5) it proposes to eliminate certain filing requirements 
in Part 33 that are outdated or no longer useful to the Commission in 
analyzing mergers. In the course of addressing these five areas, the 
NOPR proposes to reorganize Part 33 so that users of the regulations 
can quickly find those specific requirements that apply to the merger 
in which they are interested.
---------------------------------------------------------------------------

    \6\ Policy Statement at 30,128.
    \7\ PG&E Corporation and Valero Energy Corporation, 80 FERC 
para. 61,041 (1997) (PG&E/Valero); and Enron Corporation, 78 FERC 
para. 61,179 (1997) (Enron).
---------------------------------------------------------------------------

II. Background

    Part 33 of the Commission's regulations specifies the filing 
requirements for applications under Sec. 203 of the FPA.8 
Pursuant to Sec. 203, Commission authorization is required for public 
utility mergers and consolidations and for public utilities' 
acquisition or disposition of jurisdictional facilities. Section 203(a) 
of the FPA provides, in pertinent part, that:
---------------------------------------------------------------------------

    \8\ 16 U.S.C. 824b.

    No public utility shall sell, lease or otherwise dispose of the 
whole of its facilities subject to the jurisdiction of the 
Commission, or any part thereof of a value in excess of $50,000, or 
by any means whatsoever, directly or indirectly, merge or 
consolidate such facilities or any part thereof with those of any 
other person, or purchase, acquire, or take any security of any 
other public utility, without first having secured an order of the 
---------------------------------------------------------------------------
Commission authorizing it to do so.

Section 203 provides that the Commission shall approve such 
transactions if they are consistent with the public interest. The 
Commission's Part 33 filing requirements specify the information that 
is necessary for the Commission to determine whether a proposed 
transaction involving the disposition of jurisdictional facilities by a 
public utility satisfies this statutory criterion.
    As a general matter, Part 33 requires a description of the 
corporate attributes of the party or parties to the proposed 
transaction (a purchase, sale, lease, or other disposition, merger, or 
consolidation of jurisdictional facilities, or purchase or other 
acquisition of the securities of a public utility) and the facilities 
or other property involved in the transaction. Additional information 
required includes the applicants' proposed accounting treatment of the 
transaction, statements as to the effect of the transaction on current 
energy contracts, and the applicants' showing that the transaction will 
be consistent with the public interest.
    As noted previously, one of the factors the Commission considers 
when analyzing whether a merger proposal is consistent with the public 
interest is the effect on competition. The Policy Statement adopts the 
Department of Justice (DOJ)/Federal Trade Commission (FTC) 1992 
Horizontal Merger Guidelines (Guidelines) 9 as the 
analytical framework for examining horizontal market power concerns. 
The Guidelines set forth a five-step merger analysis: (1) define 
markets likely to be affected by the merger and measure the 
concentration and the increase in concentration in those markets; (2) 
assess whether the merger, in light of market concentration and other 
factors that characterize the market, raises concern about potential 
adverse competitive effects; (3) assess whether entry could mitigate 
the adverse effects of the merger; (4) assess whether the merger 
results in efficiency gains not achievable by other means; and (5) 
assess whether, absent the merger, either party to the merger would 
likely fail, causing its assets to exit the market.10
---------------------------------------------------------------------------

    \9\ U.S. Department of Justice and Federal Trade Commission, 
Horizontal Merger Guidelines, 57 FR 41,552 (1992), revised, 4 Trade 
Reg. Rep. (CCH) para. 13,104 (April 8, 1997).
    \10\ Policy Statement at 30,118.
---------------------------------------------------------------------------

    The Policy Statement also describes an analytical screen that is 
intended to allow early identification of mergers that do not raise 
competitive concerns. The Commission believes the screen produces a 
reliable, conservative analysis of the competitive effects of proposed 
mergers. As part of the screen analysis, the Policy Statement requires 
generally that the applicants define product and geographic markets 
that are likely to be affected by the proposed merger and measure the 
concentration in those markets. The Policy Statement suggests a way of 
defining geographic markets based on identifying feasible alternative 
suppliers to the merged firm--the delivered price test. The 
concentration of potential suppliers included in the market is then 
measured by the Herfindahl-Hirschman Index (HHI) and used as an 
indicator of the potential for market power.11 We describe 
the Policy Statement's

[[Page 20342]]

approach to analyzing the effect on competition in more detail below.
---------------------------------------------------------------------------

    \11\ The Policy Statement addresses three ranges of market 
concentration: (1) an unconcentrated post-merger market--if the 
post-merger HHI is below 1000, regardless of the change in HHI the 
merger is unlikely to have adverse competitive effects; (2) a 
moderately concentrated post-merger market--if the post-merger HHI 
ranges from 1000 to 1800 and the change in HHI is greater than 100, 
the merger potentially raises significant competitive concerns; and 
(3) a highly concentrated post-merger market--if the post-merger HHI 
exceeds 1800 and the change in the HHI exceeds 50, the merger 
potentially raises significant competitive concerns; if the change 
in HHI exceeds 100, it is presumed that the merger is likely to 
create or enhance market power.
---------------------------------------------------------------------------

    The Policy Statement states that the Commission will examine the 
second factor, the effect on rates, by focusing on ratepayer 
protections designed to insulate consumers from any harm resulting from 
the merger. We directed merger applicants to attempt to negotiate such 
measures with their customers before filing merger applications.
    Finally, the Policy Statement sets forth a third factor for 
examination, the effect on regulation, as it relates both to state 
regulation and to the potential shift in regulation from the Commission 
to the Securities and Exchange Commission (SEC), the latter as the 
result of a merger creating a registered public utility holding 
company. With respect to a merger's effect on state regulation, we 
stated in the Policy Statement that where the state commissions have 
authority to act on the merger, the Commission intends to rely on them 
to exercise their authority to protect state interests. With respect to 
shifts of regulatory authority from this Commission to the SEC, the 
Policy Statement explains that, unless applicants commit themselves to 
abide by this Commission's policies with regard to affiliate 
transactions, we will set the issue for hearing.
    Below, we propose filing requirements that are consistent with the 
Policy Statement. We also propose ways to update and streamline our 
current filing requirements that will help to expedite and better focus 
applications and our review processes.

III. Discussion

A. General

    As stated earlier, the Commission is examining its filing 
requirements for transactions requiring our authorization under 
Sec. 203 of the FPA in light of the fundamental changes occurring in 
the electric utility industry and the regulation of the industry. 
First, the Commission believes that a portion of the information that 
has historically been required for all Sec. 203 applications is no 
longer needed for those applications that involve routine dispositions 
of jurisdictional facilities, and, accordingly, we propose to eliminate 
certain filing requirements. Second, because of the proliferation of 
utility mergers and the growing importance of analyzing the competitive 
effects of such mergers on emerging competitive markets, the Commission 
believes that more descriptive filing requirements are needed. Finally, 
we propose to reorganize and clarify certain of our regulations under 
Part 33 in order to enhance the usefulness of those regulations. The 
goal of each of these measures is to streamline and clarify our filing 
requirements, make our processing of Sec. 203 applications more 
efficient and timely, and provide greater certainty to the industry 
regarding the Commission's probable action on applications.

B. Proposed Revisions to Part 33--Basic Information Requirements

    Part 33 currently contains twelve basic information requirements 
(Sec. 33.2(a) through (l)) and nine exhibits (Sec. 33.3 Exhibits A 
through I) that an applicant must file. Some of these requirements 
overlap. For example, Secs. 33.2(I) and 33.3 Exhibit G both concern 
applications filed with state commissions and can be consolidated. 
Other information requirements are no longer relevant to our review of 
applications filed under this part. An example is Sec. 33.3 Exhibit A, 
which concerns resolutions by applicants' directors authorizing the 
transaction for which Commission approval is requested. We do not 
believe we need this information in order to determine whether a 
transaction is consistent with the public interest. Also, a number of 
public utilities are exempt from the record-keeping requirements of the 
Commission's Uniform System of Accounts at the current Secs. 33.2(g) 
and 33.3 Exhibits C, D, E and F, which relate to financial statements 
and account balances. Accordingly, we are proposing to streamline our 
Part 33 regulations to eliminate these unnecessary or inapplicable 
information requirements, combine sections that request duplicative 
information and direct our accounting requirements only to those 
applicants subject to the Commission's Uniform System of Accounts.
    We are further proposing to eliminate entirely the current 
Sec. 33.10. The 45 day time limit set forth in that section for 
Commission action, which is not a requirement under the statute, is no 
longer feasible in light of the increasing complexity of Sec. 203 
applications being filed, especially merger and other industry 
restructuring transactions.\12\ In addition, proposed Sec. 33.6 
incorporates the requirement of the current Sec. 33.2(l) to file a form 
of notice and would require submission of the notice in electronic 
format. In addition to these modifications, discussed below are other 
proposed basic information requirements under Part 33 that reflect our 
current way of analyzing Sec. 203 applications.\13\
---------------------------------------------------------------------------

    \12\ Although we are proposing to eliminate this section of our 
Part 33 regulations, the Commission intends to continue to process 
Sec. 203 applications as expeditiously as practicable. As stated in 
the Policy Statement, the Commission continues to believe that, for 
most mergers, we can issue an initial order within 150 days of a 
completed application.
    \13\ In this preamble, we will not note the sections that do not 
have proposed revisions. However, these sections are set forth in 
the attached regulatory text.
---------------------------------------------------------------------------

    Proposed Sec. 33.1--applicability--revises the current Sec. 33.1 to 
state succinctly that the requirements of Part 33 apply to public 
utilities seeking authority for any transaction requiring Commission 
authorization under Sec. 203.
    No change is proposed in Sec. 33.2(b)--authorized representative--
except that the phone and fax numbers of the person authorized to 
receive communications regarding the application, which are already 
voluntarily provided by nearly all applicants, would be required. This 
subsection also proposes that E-mail addresses be provided.
    Proposed Sec. 33.2(c)--description of the applicant--incorporates 
the requirements of current Sec. 33.2(c) and (k) and Exhibit B and 
requires a description of the applicant's business activities, 
corporate affiliations, common officers with other parties to the 
transaction, and jurisdictional customers. Organizational charts are 
not specifically required under our current regulations; the narrative 
descriptions currently required to be filed generally are more clearly 
depicted in chart form. As a result, we propose that organizational 
charts be filed.
    Proposed Sec. 33.2(d)--description of the jurisdictional 
facilities--requires a general description of the applicant's 
jurisdictional facilities.
    Proposed Sec. 33.2(e)--description of the proposed transaction--
incorporates the requirements of current Sec. 33.2(d), (e), (f) and (h) 
requiring a description of the proposed transaction for which 
Commission authorization is sought, including all parties to the 
transaction, the jurisdictional facilities involved or affected by the 
transaction, the consideration for the transaction,\14\ and the effect 
of the transaction on the applicant's jurisdictional facilities.
---------------------------------------------------------------------------

    \14\ Policy Statement at 30,125-26 (we no longer consider the 
reasonableness of purchase price as a factor and consider it 
subsumed by the effect on rates factor).
---------------------------------------------------------------------------

    Proposed Sec. 33.2(f)--contracts related to the proposed 
transaction--incorporates the requirements of current Exhibit H. No 
other change is proposed.
    Proposed Sec. 33.2(g)--the applicant's public interest statement--
includes the requirements for applicants to address the factors that 
the Commission considers in determining whether a

[[Page 20343]]

transaction is consistent with the public interest, as set forth in the 
Policy Statement.
    Proposed Sec. 33.2(h)--maps--incorporates the requirements of 
current Exhibit I and would be applicable only if the proposed 
transaction involves a disposition of physical facilities.
    Proposed Sec. 33.2(I)--other regulatory approvals--incorporates the 
requirements of current Sec. 33.2(I) and Exhibit G. In addition, copies 
of relevant orders, if any, obtained by the applicant from other 
regulatory bodies would be required. However, we are proposing to 
eliminate a requirement that copies of the applications filed with 
those bodies be filed with the Commission, as this information largely 
duplicates the information required in our Part 33 regulations.
    Proposed Sec. 33.8--number of copies--includes the information 
required in the current Sec. 33.6 and also would require that the 
applicant file electronic as well as paper copies of any competitive 
screen analysis filed pursuant to proposed Secs. 33.3 and 33.4.
    Proposed Sec. 33.9--protective orders--would require an applicant 
to include a proposed protective order if it seeks privileged treatment 
for any information submitted. The protective order would enable the 
parties to review any of the data, information, analysis or other 
documentation relied upon by the applicant to support its application 
and for which privileged treatment is sought.

C. Proposed Filing Requirements Applicable to Merger Filings

1. Applicability
    The following filing requirements apply to merger applicants which 
are defined as any public utility that either: (a) Would have control 
of the jurisdictional facilities transferred to another entity, whether 
the transfer of control is effectuated, directly or indirectly, by 
merger, consolidation or other means; or (b) would acquire control over 
facilities of another entity, whether the transfer of control is 
effectuated, directly or indirectly, by merger, consolidation or other 
means.\15\ We are proposing that for any corporate transaction that 
results in a direct or indirect merger of public utilities, the 
applicant must file certain additional information. If the merger 
transaction involves a horizontal combination of facilities which 
results in a single corporate entity obtaining ownership or control 
over generating facilities of unaffiliated parties, the applicant must 
file the information set forth in Sec. 33.3. If the merger transaction 
involves a vertical combination of facilities resulting in a single 
corporate entity obtaining ownership or control over businesses that 
provide inputs to electric generation and electric generation products 
that were previously unaffiliated, the applicant must file the 
information set forth in Sec. 33.4.\16\
---------------------------------------------------------------------------

    \15\ Policy Statement at 30,113. See also, Duke Power Company 
and PanEnergy Corporation, 79 FERC para. 61,236 (1997) (Duke); Noram 
Energy Services, Inc., 80 FERC para. 61,120 at 61,379 and n.13 
(1997)(NORAM); Morgan Stanley Capital Group Inc., et al., 79 FERC 
para. 61,109 at 61,503-04 (1997)(Morgan Stanley); and Boston Edison 
Company and BEC Energy, 80 FERC para. 61,274 (1997).
    \16\ We noted in Enova that a merger of jurisdictional 
facilities can be effected by a change in control over a public 
utility's facilities. Public utilities (or their parent companies) 
can effect a merger by combining their businesses through the 
formation of a new holding company that will own or control, either 
directly or indirectly, previously unaffiliated entities. See Enova, 
79 FERC ] 61,107 at 61,491-96 (1997).
---------------------------------------------------------------------------

2. Effect on Competition
    The Commission's competitive concern in any type of merger 
involving jurisdictional electric utilities is whether the merger will 
result in higher prices or reduced output in electricity markets. This 
may occur if the merged firm is able to exercise market power, either 
alone or in coordination with other firms. Therefore, we are now 
proposing filing requirements, consistent with Appendix A to our Policy 
Statement, that will address this concern in a predictable and 
expedited fashion.
    a. Proposed Analytic Requirements. In Appendix A to our Policy 
Statement, we outlined a standard analytic framework for evaluating 
mergers as well as a competitive screen analysis and data 
specifications to allow the Commission to quickly identify proposed 
mergers that are unlikely to present competitive concerns. Since the 
Policy Statement was issued, we have gained valuable experience 
analyzing mergers and are now proposing filing requirements regarding 
the screen and the data needed for it.
    The Commission emphasizes that the screen is not meant to be a 
definitive test of the competitive effects of a proposed merger. 
Instead, it is intended to provide a standard, conservative check to 
allow the Commission and potential applicants to identify mergers that 
are unlikely to present competitive problems. A standardized screen 
approach allows applicants, intervenors and the Commission to have a 
common starting point from which to evaluate proposed mergers. A 
conservative screen also allows us to quickly approve mergers that pass 
if they are otherwise consistent with the public interest. Failing the 
initial screen does not necessarily mean that the Commission will not 
eventually approve the merger. Rather, it means only that the 
Commission must take a closer look at the competitive impacts of the 
proposed merger.
    When a proposed merger fails the screen and further evaluation is 
necessary, the Commission will determine what procedures are 
appropriate. The Commission recognizes that these procedures, whether 
trial-type evidentiary hearings or paper hearings, should not delay the 
processing of mergers unnecessarily and should address the competitive 
impact of the proposed merger. We solicit comments on alternative 
procedures for investigating mergers that do not pass the initial 
screen.17
---------------------------------------------------------------------------

    \17\ In the Policy Statement, we stated that we would request 
public comment in this rulemaking on merger processing procedures 
and how they can be better tailored to meet the specific needs of 
participants in merger proceedings. Policy Statement at 30,125.
---------------------------------------------------------------------------

    As we propose these filing requirements, the Commission recognizes 
the tension between the need for providing standardization regarding 
how proposed mergers will be evaluated and the need for flexibility, 
given the changing nature of the electric power industry and the likely 
evolution of analytic techniques and capabilities. The competitive 
screen analysis that we require provides for standardization. However, 
applicants are free to provide an alternative analysis, if they believe 
the additional information would aid the Commission's decision 
making.18 The Commission solicits comment on whether the 
proposed approach strikes the proper balance between standardization 
and flexibility.
---------------------------------------------------------------------------

    \18\ See Sec. 33.3(b)(2) of the proposed regulations.
---------------------------------------------------------------------------

    Finally, we recognize that some types of data, or data for some 
market participants, may not be available to the applicants. Where that 
is the case, we propose that applicants make their best efforts to 
provide accurate substitute data.19 Applicants would have to 
identify such instances, and explain how specific data deficiencies are 
addressed and the effect on their analysis. We also encourage 
applicants to provide corroborating data and to explain how such 
additional data corroborates the results of the screen analysis. 
Corroborating information and analysis will provide the Commission with 
confidence that the results of the

[[Page 20344]]

analysis would not change materially if certain assumptions or input 
data were changed in reasonable ways.
---------------------------------------------------------------------------

    \19\ The specific filing requirements are set forth in 
Sec. 33.3(b)(1) of the proposed regulations.
---------------------------------------------------------------------------

    i. Data and format. If circumstances warrant, the Commission must 
have the ability to perform, within a reasonable time, an independent 
verification of the screen analysis presented in the application. To do 
so, we (and intervenors) must have the basic input data in a useful 
format. Thus, the proposed rule would require that the data needed to 
complete the competitive screen analysis, and any additional data that 
are used, be filed electronically.20 Specific proposed data 
requirements for the various components of the competitive screen 
analysis are discussed below.
---------------------------------------------------------------------------

    \20\ The specific filing requirements are set forth in Sec. 33.8 
of the proposed regulations.
---------------------------------------------------------------------------

    ii. Horizontal Screen Analysis. As noted earlier, the Guidelines 
set out five steps for merger analysis: Assess (1) whether the merger 
would significantly increase concentration; (2) whether the merger 
would result in adverse competitive effects; (3) whether entry would 
mitigate the adverse effects of the merger; (4) whether the merger 
would result in efficiency gains not achievable by other means; and (5) 
whether, absent the merger, either party would likely fail, causing its 
assets to exit the market.21
---------------------------------------------------------------------------

    \21\ Policy Statement at 30,118.
---------------------------------------------------------------------------

    The competitive screen analysis 22 focuses on the first 
step: whether the merger would significantly increase concentration. 
Concentration statistics indicate that a merger may have adverse 
competitive effects, but they are not the end of the analysis. If the 
applicants' competitive screen analysis indicates that the merger would 
significantly increase concentration, the applicants must either 
address the other steps in the Guidelines or propose measures that 
would mitigate the adverse competitive effects of the proposed 
merger.23 If applicants propose mitigation measures, the 
screen analysis should also take into account the effect of the remedy 
on market concentration to the extent possible.
---------------------------------------------------------------------------

    \22\ These specific filing requirements are set forth in 
Sec. 33.3 of the proposed regulations.
    \23\ The specific filing requirements for applicants addressing 
other factors and mitigative measures are set forth in 
Sec. 33.2(g)(4) and Sec. 33.2(g)(3), respectively.
---------------------------------------------------------------------------

    The competitive screen analysis is made up of four steps: (1) 
Identify the products sold by the merging firms; (2) Identify the 
customers affected by the merger; (3) identify the suppliers in the 
market; and (4) analyze the merger's effect on concentration. Below we 
discuss the proposed filing requirements for each step.
    a. Products. Applicants must identify the wholesale electricity 
products sold by the merging firms. At a minimum, such products would 
include non-firm energy, short-term capacity (or firm energy) and long-
term capacity. Products should be grouped together when they are 
reasonable substitutes for each other from the buyer's perspective. The 
supply and demand conditions for particular electricity products may 
vary substantially over time and, if so, the market analysis should 
take this into account. Periods with similar supply and demand 
conditions should be aggregated. Thus, applicants must define and 
describe all products sold by the firms, explain and support the market 
conditions and groupings, and provide all data relied upon for product 
definition. The specific proposed filing requirements are set out in 
Sec. 33.3(c)(1) of the proposed regulations.
    As restructuring in the wholesale and retail electricity markets 
progresses, short-term markets appear to be growing in importance. The 
role of long-term capacity markets appears to be diminishing. We seek 
comments on the assessment of long-term capacity markets in merger 
analysis.
    The delivered price test, which we require applicants use to 
identify suppliers in a market, addresses the ability of suppliers to 
deliver energy to relevant markets as measured by their short-term 
variable costs. However, there is no good measure for long-term 
capacity prices per se. Therefore, we seek comment on the appropriate 
analytic framework for evaluating long-term capacity products.
    b. Geographic markets: Customers (Destination Markets). As 
discussed in the Policy Statement, identifying the customers likely to 
be affected by a merger is one part of defining the geographic scope of 
the relevant market. At this time, we believe that, at a minimum, 
affected customers would include all entities that are directly 
interconnected to any of the applicants or that have purchased 
wholesale electricity from any of the applicants in the past two years. 
The Commission solicits comment on whether two years is the appropriate 
period of purchases for deciding to include purchasers as affected 
customers.24 Customers considered to be affected by the 
merger and included in the analysis are referred to as ``destination 
markets.'' To simplify the analysis, customers that have the same 
supply alternatives, as identified in the competitive screen analysis, 
could be aggregated into a single destination market.
---------------------------------------------------------------------------

    \24\ The Policy Statement states that entities in addition to 
those directly interconnected with applicants would be included if 
historical transaction data indicate that they recently have been 
trading partners with any of the applicants. Policy Statement at 
30,130.
---------------------------------------------------------------------------

    Applicants would be required to provide all data used in 
determining the affected customers. The specific proposed filing 
requirements associated with identifying affected customers are set out 
in Sec. 33.3(c)(2) of the proposed regulations.
    c. Geographic markets: Suppliers. Defining the relevant geographic 
market also requires identifying the sellers that can compete to supply 
a relevant product. Suppliers must be able to reach the destination 
market both economically and physically.
    In some cases, potential suppliers may be parties to mergers that 
have been announced but not yet consummated. Without presupposition, 
the Commission seeks comments on whether those suppliers should be 
treated in the competitive screen analysis as if their merger has been 
consummated or whether they should be treated as independent 
rivals.25
---------------------------------------------------------------------------

    \25\ The specific filing requirements are set out in 
Sec. 33.3(c)(3) of the proposed regulations.
---------------------------------------------------------------------------

(1) Delivered Price Test
    To determine the suppliers that can economically supply a 
destination market, applicants must conduct a delivered price 
test.26 In the delivered price test, a supplier is 
considered to be able to economically serve destination markets only to 
the extent it has generating capacity that can be supplied and 
delivered to the market at a price, including paying for transmission 
and ancillary services needed to deliver power to a destination market, 
that is no more than 5 percent above the pre-merger market 
price.27 Applicants must then adjust, if necessary, the 
capacity of each supplier identified in the delivered price test 
consistent with the physical transmission capacity available to reach 
the destination market.
---------------------------------------------------------------------------

    \26\ The specific filing requirements are set forth in 
Sec. 33.3(c)(3)(i) of the proposed regulations.
    \27\ Policy Statement at 30,130-31.
---------------------------------------------------------------------------

    The Commission proposes to require that a supplier's ability to 
economically serve a destination market be measured by the generating 
capacity controlled by the supplier rather than historical sales data. 
Since merger analysis should, to the extent possible, be forward-
looking, capacity is a better indicator of future market supply 
alternatives. Information about current or past sellers may not 
identify those participants whose generation capacity could discipline

[[Page 20345]]

future price increases. Moreover, data on sales made in a past 
environment that was characterized by monopoly and cost-based rates may 
not be a good indicator of how firms will behave in an environment that 
is increasingly characterized by generation competition and open access 
transmission.\28\
---------------------------------------------------------------------------

    \28\ Baltimore Gas & Electric Company and Potomac Electric Power 
Company, Opinion No. 412, 76 FERC para. 61,111 (1996), 79 FERC para. 
61,027 at 61,120-21 (1997) (BG&E/PEPCO). This is not to say, 
however, that sales data are irrelevant to market analysis. If sales 
data indicate that certain participants actually have been able to 
reach the market in the past, it is appropriate to consider whether 
they are likely candidates to be included in the market in the 
future. BG&E/PEPCO at n.72. It is for this reason that we propose to 
require a ``trade data check'' as part of the competitive screen 
analysis.
---------------------------------------------------------------------------

    In the Policy Statement, we discussed two generating capacity 
measures that are appropriate for the competitive screen analysis: 
economic capacity and available economic capacity. We propose that the 
competitive screen analysis filed by applicants use both measures to 
gauge supplier presence. The starting point for calculating economic 
capacity is the supplier's own generation capacity with low enough 
variable costs that energy from it could be delivered to a market, 
after paying all necessary transmission and ancillary service costs 
(including losses), at a price that is 5 percent or less above the pre-
merger market price. This capacity must be decreased to reflect the 
capacity committed to long-term firm sales and increased to reflect the 
capacity acquired by long-term firm purchases.\29\ Capacity that is 
under the operational control of a party other than the owner should be 
attributed to the party for whose economic benefit the unit is 
operated. The resulting amount is the capacity that should be counted 
as a supplier's economic capacity.
---------------------------------------------------------------------------

    \29\ Long-term firm contracts are those with a remaining 
commitment of more than one year.
---------------------------------------------------------------------------

    The other measure of supplier presence relevant to the competitive 
screen analysis is available economic capacity. Available economic 
capacity is calculated as economic capacity less the capacity needed to 
serve native load customers.\30\ We propose that applicants include 
this measure in their screen analysis for all suppliers that have 
native load commitments. This measure presumes that the lowest-cost 
capacity is used to serve native load and is thus not available to 
compete in wholesale power markets. However, restructuring in the 
electricity industry, including regional independent systems operators 
(ISO) and bid-based power exchanges and retail access, may well affect 
this presumption. The Commission seeks comments on the role of native 
load and the weight that the available economic capacity measure should 
be given, in market analyses.
---------------------------------------------------------------------------

    \30\ Native Load Customers are defined as the wholesale and 
retail power customers on whose behalf a utility, by statute, 
franchise, regulatory requirement, or contract, has an obligation to 
construct and operate the system to meet the reliable electric needs 
of such customers.
---------------------------------------------------------------------------

    Applicants may include additional capacity measures, such as total 
capacity and uncommitted capacity, as they see fit.\31\
---------------------------------------------------------------------------

    \31\ Uncommitted capacity is total capacity less the capacity 
needed to serve native load and contractual commitments and to cover 
reserve margins. In contrast to economic capacity, this measure, as 
well as total capacity, does not take into account whether the 
capacity can economically serve a market.
---------------------------------------------------------------------------

    Determining which suppliers may economically serve the relevant 
destination markets requires data regarding generation costs, 
transmission prices, and transmission limitations. To facilitate the 
Commission's analysis, these data should be filed electronically and 
presented in a standard format. Discussed below are the proposed 
general data requirements that we believe are needed to determine the 
suppliers in the relevant market for a competitive screen analysis.
    Generating capacity and variable cost: The basic determinants of a 
supplier's presence in a market are the generating capacity that the 
supplier controls and the variable costs associated with that capacity. 
For each potential supplier to a relevant market, applicants must file 
the publicly available generation capability and variable cost data for 
each generating plant or unit. Aggregate plant level data from plants 
with units that burn different fuels can result in average plant 
variable costs that inaccurately state the units' economic ability to 
sell into a market.\32\ For such plants, cost data at the unit level 
are preferable to cost data at the plant level, and applicants should 
file disaggregated plant data to the extent it is publicly available. 
The specific filing requirements for generating unit data are set out 
in Sec. 33.3(d)(1) of the proposed regulations.
---------------------------------------------------------------------------

    \32\ We have noted such inaccuracies in our analysis in a prior 
case. See B&GE/PEPCO at 61,119-120.
---------------------------------------------------------------------------

    Purchase and sales data adjustments: Data regarding the long-term 
purchases and sales of suppliers should be filed with the application. 
These data would, to the extent available, include the buyer, the 
seller, the contract duration, the degree of interruptibility, the 
quantity (MW), the capacity and energy charge. Applicants must show the 
adjustments made to suppliers' capacity due to the long-term contracts. 
The specific filing requirements for purchase and sales data are set 
out in Sec. 33.3(d)(2) of the proposed regulations.
    Native load commitment adjustments: If applicants use the available 
economic capacity measure in the competitive screen analysis, they must 
file historical data regarding hourly native load commitments for the 
most recent two years, if such data are publicly available.\33\ The 
Commission seeks comment on whether two years is the appropriate period 
for requiring native load data. The specific filing requirements for 
reporting native load commitments are set out in Sec. 33.3(d)(3) of the 
proposed regulations.
---------------------------------------------------------------------------

    \33\ Hourly data are available in electronic format from the 
FERC Form 714, Annual Electric Control and Planning Area Report.
---------------------------------------------------------------------------

    Other adjustments to supplier capacity: Other adjustments to 
reflect a supplier's competitive ability to serve a destination market 
may be appropriate. Applicants must support any such adjustments with 
adequate analyses and set out all data and assumptions used. The 
specific filing requirements are set forth in Sec. 33.3(c)(3)(ii) of 
the proposed regulations.
    There may be instances where a generation supplier's ability to 
participate in markets is limited by statutory restrictions. For 
example, the tax-exempt status of municipal generators can be 
jeopardized if they sell more than a certain percentage of their tax-
exempt financed generation to private utilities. Another example is the 
geographic limitations placed on the Tennessee Valley Authority's 
wholesale sales activities. Failing to recognize such restrictions 
could overstate the ability of such generation suppliers to compete and 
thereby to discipline prices in a market. Applicants must describe any 
statutory restrictions that may apply to generation suppliers included 
in their competitive screen analyses.
    Another adjustment that may be needed to accurately represent a 
supplier's ability to sell into markets is reserve requirements for 
reliability or other reasons. Generation capacity that must be held in 
reserve is not available to be sold into markets on a firm basis to 
respond to price increases, and therefore should not be attributed to 
the supplier in the competitive screen analysis. Applicants must 
describe reserve requirements and discuss how those requirements affect 
the availability of each unit included in the competitive analysis.
    Finally, we note that one type of adjustment that applicants have 
proposed is to limit a supplier's

[[Page 20346]]

capacity, for purposes of calculating market shares, to the demand of 
individual destination markets. The Commission found that such an 
adjustment is not appropriate because it is inconsistent with the 
Commission's concern with the relative ability of suppliers to dominate 
a market.\34\ We seek comments on this approach.
---------------------------------------------------------------------------

    \34\ Ohio Edison Company, et al., 80 FERC para. 61,039 at 61,104 
(1997) (FirstEnergy).
---------------------------------------------------------------------------

    Transmission prices and loss factors: An important factor in 
determining whether capacity can serve a destination market is the 
transmission costs that would be incurred in delivering generation 
services to a destination market. The Policy Statement recognizes that 
prices paid for transmission and ancillary services should be added to 
the variable costs of a supplier's capacity.\35\ For purposes of the 
competitive screen analysis, applicants must use the maximum tariff 
rates in public utilities' open access tariffs on file with the 
Commission. Where a non-public utility's transmission system is 
involved, the maximum tariff rates under its non-jurisdictional (NJ) 
open access reciprocity tariff would be used. If an NJ tariff for an 
entity has not been submitted to the Commission, applicants should use 
their best efforts to obtain or estimate transmission and ancillary 
services rates.\36\ Transmission and ancillary service prices used in a 
competitive screen analysis, that are not found in publicly-available 
tariffs or rate schedules, would have to be adequately supported.
---------------------------------------------------------------------------

    \35\ Policy Statement at 30,131.
    \36\ Non-public utilities that are members of Regional 
Transmission Groups (RTGs) are required to file transmission tariffs 
with the RTG. Maximum rates may be found in the RTG tariffs. Such 
information also may be available on a non-public utility's OASIS.
---------------------------------------------------------------------------

    Consistent with the conservative nature of the competitive screen 
analysis, the Commission proposes to require that the transmission 
prices used be the maximum tariff rates in the open access tariffs. 
Applicants could present, in addition to the required screen analysis, 
a separate analysis using lower discounted transmission rates if 
applicants can demonstrate that discounted lower rates have been 
generally available and that discounting is likely to be available in 
the future.\37\
---------------------------------------------------------------------------

    \37\ For public utilities (and non-public utilities with OASIS), 
evidence should be available from OASIS archives. OASIS database 
transaction data must be retained and made available upon request 
for three years after they were first posted. See 18 CFR 37.7.
---------------------------------------------------------------------------

    Restructuring efforts in some regions may result in transmission 
pricing regimes that depart from traditional system-specific, average 
cost prices. We propose to require that the transmission pricing used 
in the competitive screen analysis and the data presented in the filing 
reflect the transmission pricing regime in effect in the relevant 
geographic markets.
    For each transmission system that a supplier must use to deliver 
energy to a relevant destination market, applicants must provide 
specific data, including the transmission provider's name, the firm and 
non-firm point-to-point rates as well as the ancillary services rates, 
loss factors and an estimate of the cost of supplying energy losses. 
Where tariff rates that are expressed as $/MW are converted to $/MWH, 
applicants would have to explain the conversion. Applicants must also 
explain how suppliers are assigned transmission contract paths to the 
destination markets. The specific filing requirements for transmission 
rate and loss factor data are set out in Sec. 33.3(d)(4) of the 
proposed regulations.
    Market price: As discussed in the Policy Statement, a supplier's 
capacity may be included in a relevant market, for purposes of the 
competitive screen analysis, if it can be delivered into the market at 
a price that is no more than 5 percent above the pre-merger market 
price.38 We therefore propose that the application present 
and support market prices for each relevant destination market under 
various significant market conditions. Significant market conditions 
include, for example, those characterized by periods of high (peak) or 
low (off-peak) demand and by transmission constraints.39
---------------------------------------------------------------------------

    \38\ Policy Statement at 30,131.
    \39\ Delmarva at 61,408.
---------------------------------------------------------------------------

    As discussed in the Policy Statement, the Commission does not 
believe that all electricity markets have matured sufficiently to 
exhibit single market-clearing prices for various products. Therefore, 
applicants may estimate market prices using surrogate measures. The 
Commission seeks comments on whether there are appropriate criteria for 
determining when surrogate price measures are needed. We do not propose 
at this time a specific method for estimating market prices. However, 
the results must be supported and consistent with what one would expect 
in a competitive market. For example, we would expect prices to vary 
little from customer to customer in the same region during similar 
demand conditions (if there are no transmission constraints), but we 
would expect prices to vary between peak and off-peak 
periods.40 Where results that are at odds with those that 
would be expected under competitive market conditions are shown, 
applicants would explain such results. We also encourage applicants to 
use more than one approach to estimating market prices in order to 
demonstrate that the market price estimates are valid.
---------------------------------------------------------------------------

    \40\ FirstEnergy, 80 FERC at 61,105-106.
---------------------------------------------------------------------------

    To support the market price estimates, applicants must file any 
cost or sales data relied upon in estimating the price, as well as an 
explanation of how the data were used to determine the estimates. The 
specific filing requirements for market price data are set out in 
Sec. 33.3(d)(5) of the proposed regulations.
(2) Transmission Capability
    The capacity of suppliers that is determined to be economic in a 
relevant destination market (that is, capacity that can be delivered at 
a cost that is no more than 5 percent above the pre-merger market 
price) may be included in a relevant market, for purposes of the 
competitive screen analysis, only to the extent that transmission 
capability is available to the supplier. Such capacity is calculated as 
the sum of available transmission capability (ATC) and any firm 
transmission rights held by the supplier that are not committed to 
long-term transactions. Thus, the extent of transmission capability and 
the allocation of the rights to use that capability are the important 
factors in determining a supplier's ability to physically reach a 
market. This section discusses the data and analyses that we propose to 
require to allow us independently to estimate each economic supplier's 
ability to reach a market.
    Physical capability: For those suppliers determined to be able to 
economically serve a relevant destination market, applicants must 
present data on transmission capability for each transmission system a 
supplier must use to deliver energy to relevant destination markets. To 
the extent available, these data would include total transfer 
capability (TTC) and firm ATC, and must be consistent with values 
posted on the OASIS. We are, however, concerned that the sum of 
transfer capabilities reported on OASIS sites could exceed the 
simultaneous transfer capability. We therefore propose that the 
transmission capability be reported as simultaneous transfer capability 
to avoid attributing more generating capacity to a market than could 
actually reach it under actual operating conditions. The Commission 
understands, however, that simultaneous transfer capability data may 
not be generally available. Where that is the case, applicants must use 
the

[[Page 20347]]

best data available to avoid overestimating transfer capability. For 
example, the analysis should not add together the capabilities of 
several interfaces if the transfer capability into a market is limited 
by the same facility.41
---------------------------------------------------------------------------

    \41\ FirstEnergy at 61,104.
---------------------------------------------------------------------------

    Applicants must also identify the hours when transmission 
constraints have been binding and the levels at which they were 
binding. The application would also present data regarding whether and 
how the proposed merger would change line loadings and the consequent 
effect on transfer capability. To the extent possible, applicants would 
provide maps showing the location of transmission facilities where 
binding constraints currently occur or are expected to occur as a 
result of the merger. The Commission seeks comment regarding the 
parameters that determine when a binding constraint is significant 
enough to cause competitive concern. For example, is there a minimum 
number of hours that a constraint must last to be of concern?
    The Commission understands that applicants must depend on publicly-
available information regarding transmission capability for systems 
other than their own, and that some of the information discussed above 
may not be generally available for all systems. Applicants should file 
the best available data regarding systems other than their own. 
However, all of the data discussed in this section regarding 
applicants' systems is available to the applicants, and such data must 
be filed, even if it is not available for all other systems. An 
accurate representation of transmission conditions on or close to the 
applicants' systems, where the merger's effects are likely to be 
greatest, is important. The specific filing requirements for 
transmission capability data are set out in Sec. 33.3(d)(7) of the 
proposed regulations.
    Firm transmission rights: Transmission capacity along transmission 
paths between suppliers and destination markets that is reserved under 
a long-term firm transmission contract by suppliers should be presumed 
to be available to other suppliers unless the capacity is committed to 
a long-term power transaction. Applicants must identify such 
transmission capability and provide supporting information, including 
the FERC rate schedule numbers if the transmission provider is a public 
utility. The specific filing requirements for firm transmission rights 
data are set out in Sec. 33.3(d)(8) of the proposed regulations.
    Allocation of transmission capability: Transmission capability that 
is not subject to existing firm reservations by others may be presumed 
for purposes of the competitive screen analysis to be available to 
economic suppliers to reach the relevant markets. However, this would 
not be the case for transmission capability on interfaces that would 
become internal to the merged firm after the merger. If, after a 
merger, the merged firm would have either generating resources or load 
on both sides of the interface, and would have ownership or entitlement 
interests in the interface on both sides, the transmission capability 
on that interface could be used to serve native load. Since native load 
generally would have a higher reservation priority than most third 
party uses, it could preclude access by other suppliers to that 
interface.42 Consistent with past decisions, the Commission 
proposes that, for purposes of the competitive screen analysis, it 
would be inappropriate to allocate to competing sellers unreserved 
capability over interfaces internal to the merged company unless the 
applicants demonstrate that: (a) the merged company would not have 
adequate economic generating capacity to use the interface capability 
fully, (b) the applicants have committed that the portion of the 
interface capability allocated to third parties actually will in fact 
be available to such parties, or (c) alternate suppliers have purchased 
the transmission capability on a long-term basis.43 Any 
allocation of internal transfer capability to third parties consistent 
with the above guidance must be adequately explained and supported.
---------------------------------------------------------------------------

    \42\ Wisconsin Electric Power Company, et al. (Primergy), 79 
FERC para. 61,158 at 61,694 (1997), and FirstEnergy at 61,107.
    \43\ FirstEnergy at 61,103-04.
---------------------------------------------------------------------------

    In many cases, multiple suppliers could be subject to the same 
transmission path limitation to reach the same market, and the sum of 
their economic generation capacity could exceed the transmission 
capability available to them. Where this situation arises, the 
competitive screen analysis would have to allocate the transmission 
capability among the suppliers' generating capacity. There are a number 
of methods for accomplishing this. Applicants must describe and support 
the method used and show the resulting transfer capability allocation. 
The Commission is not proposing a single method at this time, but we 
invite comments on the merits of various approaches to allocating 
transmission capability in the competitive screen analysis.
    Summary of supplier presence. The Commission proposes to require 
that applicants provide a table summarizing supplier presence in each 
of the relevant destination markets. The table would include the market 
designation, the product, the name of each supplier, and the amount of 
generation capacity that each supplier can economically deliver to the 
market after accounting for available transmission capability. The 
specific filing requirements for this summary of supplier presence are 
set out in Sec. 33.3(d)(9) of the proposed regulations.
(3) Historical Data
    The Commission proposes that applicants file certain historical 
data that can be used to corroborate the results of the competitive 
screen analysis. We understand that applicants must depend on publicly-
available information for the vast majority of the screen analysis and 
that some detailed data may not be generally available for all market 
participants. However, certain important data regarding applicants' 
transactions and transmission systems are available to the applicants 
and should be filed.
    Trade data. The Commission proposes to require that applicants file 
actual trade data regarding sales and purchases in which applicants 
participated for the most recent two years for which data are 
available. These data will be used to corroborate the suppliers 
identified as participating in the relevant destination market and the 
extent of their participation. We would expect some correlation between 
the results obtained by the competitive screen analysis and recent 
trade patterns. Applicants must provide an explanation of any 
significant differences.
    We propose to require applicants to file trade data regarding all 
electricity sales and purchases in which they participated, identifying 
the seller, the buyer, the characteristics of the product traded and 
the price. The specific filing requirements for this historical trade 
data are set out in Sec. 33.3(d)(10).
    Transmission service data. The competitive screen analysis 
evaluates the ability of suppliers to access relevant markets 
economically and physically. One of its critical components is the 
availability of transmission capacity. While applicants would be 
required under the proposed rule to file estimates of ATC and TTC used 
in the competitive screen analysis, historical transmission service

[[Page 20348]]

information would be valuable to corroborate the results of the 
analysis that use ATC and TTC estimates. The Commission therefore 
proposes to require that applicants submit a description of all 
instances in the two years preceding the application in which 
transmission service on their systems has been denied, curtailed or 
interrupted. This description should, to the extent such data are 
available from OASIS sources, identify the requestor, the type, 
quantity and duration of service requested, the affected transmission 
path, the period of time covered by the service requested, the 
applicants' response, the reasons for the denial and the reservations 
or other use anticipated by the applicants on the affected transmission 
path at the time of the request. The specific filing requirements for 
this transmission service data are set out in Sec. 33.3(d)(11).
    d. Concentration Statistics. The final step of the competitive 
screen analysis is to assess market concentration. Applicants must file 
pre- and post-merger market concentration statistics calculated in 
accordance with the preceding sections. Both HHIs and single-firm 
market share statistics should be presented. The specific filing 
requirements for concentration statistics are set out in 
Sec. 33.3(c)(4) of the proposed regulations.
    The HHI statistics would be compared with the thresholds given in 
the Guidelines.44 If the thresholds are not exceeded, no 
further analysis need be provided in the application. If an adequately 
supported screen analysis shows that the merger would not significantly 
increase concentration, and there are no interventions raising 
substantial concerns regarding the merger's effect on competition which 
cannot be resolved on the basis of the written record, the Commission 
would not look further at the effect of the merger on competition. If, 
however, the HHI statistics exceed the thresholds, the applicants must 
either propose mitigation measures that would remedy the merger's 
potential adverse effects on competition or address the other DOJ 
merger analysis factors.
---------------------------------------------------------------------------

    \44\ See n.11 supra.
---------------------------------------------------------------------------

    e. Mitigation Measures and Analysis of Other Factors. In lieu of 
addressing the additional factors that would lessen concern regarding 
the adverse competitive impact of a proposed merger, applicants may 
propose mitigation measures. Proposals must be specific, and the 
applicant must demonstrate that proposed measures adequately mitigate 
any adverse effects of the merger.
    Some mitigation measures can be shown to directly lower market 
concentration. Examples of such measures are generation divestiture and 
transmission rate reforms (such as the elimination of pancaked rates) 
that broaden the geographic market. A properly structured ISO or other 
regional transmission entity can lower concentration by both 
eliminating the pancaking of rates and encouraging new entrants. Where 
such measures are proposed, the application must also include, to the 
extent possible, a separate analysis demonstrating the effect of the 
proposal on market concentration. Other measures may not be directly 
linked to decreases in market concentration. Where such other measures 
are proposed, the application must include an analysis demonstrating 
how the proposed measure will ensure that the merger will not adversely 
affect competition in markets where the screen analysis shows a 
significant adverse effect on concentration. The specific filing 
requirements concerning mitigation measures are set out in 
Sec. 33.2(g)(3).
    Where the competitive screen analysis indicates concentration 
results that exceed the thresholds but mitigation measures are not 
proposed, applicants must provide additional analysis. The Guidelines 
describe four additional factors to examine in situations where merger-
induced concentration exceeds specified thresholds.45 These 
factors provide additional information that can be used to determine if 
a merger raises significant competitive concerns and, if so, if there 
are countervailing considerations. Based on the Guidelines, the 
Commission proposes that applicants evaluate the following four factors 
if the results of the screen analysis show that the concentration 
thresholds are exceeded: the potential adverse competitive effects of 
the merger; whether entry by competitors can deter anticompetitive 
behavior or counteract adverse competitive effects; the effects of 
efficiencies that could not be realized absent the merger; and whether 
one or both of the merging firms is failing and absent the merger the 
failing firm's assets would exit the market.
---------------------------------------------------------------------------

    \45\ These factors are those discussed in steps two through five 
of the DOJ Guidelines.
---------------------------------------------------------------------------

    Applicants' analysis of these additional factors must be consistent 
with the standards discussed in the Guidelines. For example, the 
Guidelines require that entry must be timely, likely and sufficient in 
magnitude to deter or counteract the adverse competitive effects of 
concern in order to be considered an effective mitigating 
factor.46 The Guidelines suggest that entry must occur 
within two years of the merger to be considered timely, and that all 
phases of entry must occur within the two-year period, including 
planning, design, permitting, licensing and other approvals, 
construction and actual market impact.47 Given the current 
lead times for bringing new generation or transmission capacity on 
line, it may be unlikely that entry can be a mitigating factor unless 
facilities are already in the planning or construction stages at the 
time of the application.48 The specific filing requirements 
for these additional factors are set out in Sec. 33.2(g)(4) of the 
proposed regulations.
---------------------------------------------------------------------------

    \46\ Guidelines, 57 FR at 41,561.
    \47\ Id. at 41,561-562.
    \48\ For example, we found in Primergy that timely entry would 
not occur and thus was not a mitigating factor to the 
anticompetitive effects of the proposed merger. 79 FERC 61,158 at 
61,695-696.
---------------------------------------------------------------------------

    f. Merger applications that are exempt from filing a competitive 
screen analysis. There are mergers where the filing of a full-fledged 
horizontal or vertical screen analysis may not be warranted because it 
is relatively easy to determine that such merger proposal will not have 
an adverse impact on competition (e.g., one of the merging parties 
operates entirely on the East Coast and the other merging party 
operates entirely on the West Coast). The Commission applied the policy 
of not always requiring a full competitive screen analysis in its 
approval of the Duke/PanEnergy merger, finding that even though 
applicants had not performed a complete Appendix A analysis, 
nevertheless the generating facilities of PanEnergy are so small and 
are located at such a great distance from Duke Power Company's market 
that consolidating them is likely to have a negligible effect on market 
concentration.49
---------------------------------------------------------------------------

    \49\ Duke, 79 FERC at 62,037 (1997).
---------------------------------------------------------------------------

    Similarly, some mergers that only incidentally involve public 
utilities would not require a rigorous competitive screen analysis. An 
example is when major financial firms change their ownership structure 
in some way and one or both have a power marketing subsidiary. In this 
case, the principal interest in jurisdictional facilities would be the 
market-based power sales tariff of the power marketer since it would 
not own or control any generation.
    Therefore, with regard to horizontal mergers, we propose that a 
merger applicant need not provide the full competitive screen analysis 
otherwise required under Sec. 33.3 if the applicant

[[Page 20349]]

affirmatively demonstrates that the merging entities do not operate in 
the same geographic markets or, if they do, the extent of such 
overlapping operation is de minimis. The Commission seeks comment 
regarding the appropriate threshold for the de minimis test.
    iii. Vertical Screen Analysis. The previous section describes the 
filing requirements for the analytic framework for evaluating the 
competitive effects of horizontal mergers, that is, mergers involving 
two or more jurisdictional electric utilities. However, we noted in the 
Policy Statement that we intended to apply the same analytic framework 
to mergers between electric utilities and firms that provide inputs for 
electricity generation, for example, ``vertical'' mergers.50 
Mergers may have both horizontal and vertical aspects.
---------------------------------------------------------------------------

    \50\ Policy Statement at 30,113.
---------------------------------------------------------------------------

    Since the Policy Statement was issued, the Commission has acted on 
seven vertical mergers.51 In analyzing these cases, the 
Commission developed a basic approach for assessing whether a vertical 
merger is likely to adversely affect competition in electricity 
markets. The framework used by the Commission was informed by the DOJ/
FTC approach to evaluating vertical mergers and drew from the analytic 
framework described in the Policy Statement.
---------------------------------------------------------------------------

    \51\ See Enova, LILCO, NORAM, Duke/PanEnergy, PG&E Corporation 
and Valero Energy Corporation, 80 FERC para. 61,041 (1997) (PG&E/
Valero); Destec Energy, Inc. and NGC Corporation, 79 FERC, para. 
61,373 (1997) (Destec/NGC); Enron Corporation, 78 FERC, para. 61,179 
(1997) (Enron).
---------------------------------------------------------------------------

    We are now formally proposing an analytic framework and the filing 
requirements to support that framework to evaluate the competitive 
effects of vertical mergers. This proposed analytic framework is 
consistent with the basic approach used by the Commission to evaluate 
vertical aspects of prior mergers.
    The Commission has streamlined this vertical analytic framework and 
proposes certain abbreviated filing requirements and limitations on the 
scope of our review.52 This should greatly reduce the number 
of applications that will require a complete analysis of the vertical 
aspects of a proposed merger involving a jurisdictional public utility.
---------------------------------------------------------------------------

    \52\ These specific filing requirements are set forth in 
Sec. 33.4 of the proposed regulations.
---------------------------------------------------------------------------

    For example, a merger cannot impair competition in ``downstream'' 
electricity markets if it involves an input supplier (the ``upstream'' 
merging firm) that sells: (1) a product that is used to produce only a 
de minimis amount of the relevant product in the downstream geographic 
market or (2) no product into the downstream electricity geographic 
market. If such a showing is made, an applicant will not be required to 
file additional information regarding the vertical aspects of a 
proposed merger. We believe these proposed abbreviated filing 
requirements will result in the expeditious processing of mergers that 
clearly present no vertical competitive concerns.
    In cases where more complete information is necessary for the 
Commission to determine the competitive effects of a vertical merger, 
we propose an analytic framework comprising four elements: (1) define 
the relevant products traded by the upstream and downstream merging 
firms; 53 (2) define the relevant downstream and upstream 
geographic markets; (3) evaluate competitive conditions using market 
share and concentration HHI statistics in the downstream and upstream 
geographic markets; and (4) evaluate the potential adverse effects of 
the proposed merger in relevant downstream and upstream geographic 
markets and, if appropriate, other factors that can counteract such 
effects, including the ease of entry into either the upstream market or 
the downstream market and merger-related efficiencies.
---------------------------------------------------------------------------

    \53\ There may be several relevant upstream input products (such 
as fuel transportation and turbine manufacturers).
---------------------------------------------------------------------------

    We propose establishing the same filing requirements for the 
components of the proposed vertical analytic framework that have 
counterparts in the horizontal screen analysis, such as defining 
relevant downstream geographic markets using a delivered price test. 
Filing requirements for other parts of the vertical analysis, such as 
defining upstream geographic markets, would be only generally 
specified. Our proposed analytic framework for analyzing the 
competitive effects of vertical mergers and associated filing 
requirements are explained more fully below. We solicit comments on 
both the reasonableness of the framework and the adequacy of the 
information required to analyze vertical competitive issues.
    a. Vertical Analytic Framework. As discussed earlier, the 
Commission's competitive concern in any merger involving jurisdictional 
electric utilities is whether the merger will affect competition in 
electricity markets through higher prices or reduced output. Horizontal 
mergers can cause this by eliminating a competitor from the market and 
by the exercise of market power by the merged firm. Vertical mergers do 
not directly eliminate a competitor from the market but may create or 
enhance the incentive for the merged firm to adversely affect prices 
and output in the downstream electricity market.\54\ This effect on 
prices and output can occur in a number of ways, including: (i) 
foreclosure/raising of rivals' costs; (ii) facilitating coordination; 
and (iii) evasion of regulation.\55\
---------------------------------------------------------------------------

    \54\ Horizontal mergers may give rise to a higher market share 
for the merged entity and increase concentration in the market. 
Market share and concentration are not directly affected by a solely 
vertical merger.
    \55\ See Enova, 79 FERC para. 61,372 at 62,560.
---------------------------------------------------------------------------

    Foreclosure/Raising Rivals' Costs: A merger between an entity 
owning downstream electric generation and an entity owning an upstream 
input supplier to competitors of that generation may create the 
incentive for the upstream firm to exclude the merged firm's downstream 
generation competitors from access to inputs. The upstream merging firm 
can accomplish this through pricing, marketing and operational actions 
that would raise the input costs of suppliers competing with the 
downstream merging firm or by otherwise restricting such suppliers' 
input supply.\56\ This behavior can also deter entry by rival 
generators in the downstream market.\57\
---------------------------------------------------------------------------

    \56\ Foreclosure can also result from a vertical merger if the 
downstream merging firm refuses to purchase from input suppliers 
other than its upstream affiliate.
    \57\See Enova, 79 FERC para. 61,372 at 62,560.
---------------------------------------------------------------------------

    A vertical merger can create or enhance the ability of the merged 
firm to adversely affect electricity prices or output in the downstream 
market by raising rivals' input costs if the upstream and downstream 
geographic markets are susceptible to the exercise of market power. 
Under these circumstances in the upstream market, generators purchasing 
from the upstream merging firm could not turn to alternative suppliers 
to avoid an increase in input prices. Similarly, customers of the 
merging downstream firm would not be able to turn to alternative 
electricity suppliers to avoid an increase in electricity prices. The 
Commission requests commenters to address the extent to which vertical 
mergers in the energy industry could result in foreclosure or raising 
rivals' costs problems.
    Facilitating Anticompetitive Coordination: Vertical mergers can 
also facilitate anticompetitive ``coordination.'' \58\ A vertical 
merger can

[[Page 20350]]

facilitate anticompetitive coordination in either the upstream or 
downstream markets if, in either case, the merger: (1) Creates or 
enhances the ability of competing firms to agree to raise prices or 
restrict output or (2) dampens the incentive for firms to compete 
aggressively on price or service. Whether anticompetitive coordination 
results in higher electricity prices or lower output depends on the 
competitive conditions in the upstream and downstream geographic 
markets. In addition, anticompetitive coordination can be increased if 
information, useful for coordinated behavior and not available 
elsewhere, must be shared between the upstream firm and its customers, 
and there are substantial transactions between the upstream merging 
firm and non-affiliated customers.\59\
---------------------------------------------------------------------------

    \58\ Anticompetitive coordination refers generally to the 
exercise of market power through the concurrence of other (non-
merging) firms in the market or on coordinated responses by those 
firms. See supra n.9. We emphasize that in the electric utility 
industry, the terms ``coordination'' or ``coordinating activities'' 
apply in a specific context. For example, coordinating with other 
firms in downstream electricity markets in the creation of 
independent system operators would not raise competitive concerns. 
The Commission has also long encouraged technical coordination in 
order to promote reliability.
    \59\ There are many examples of potential anticompetitive 
coordination. One possibility is if the downstream merging firm 
obtains price quotes and other sensitive competitive information 
from other (non-merging) upstream suppliers and transfers it to its 
upstream merging partner. The exchange of such information among 
upstream input suppliers can be potentially useful in agreeing to 
raise prices or restrict output to all downstream customers.
---------------------------------------------------------------------------

    The Commission is aware that the potential mechanisms through which 
a vertical merger could facilitate anticompetitive coordination and the 
conditions under which such coordination would result in competitive 
harm are complex and subject to some debate. In a later section, we 
solicit general comment on anticompetitive coordination and how, or if, 
it should be addressed in an analytic framework.
    Regulatory Evasion: We solicit comment on the potential for 
vertical mergers involving jurisdictional electric utilities to result 
in regulatory evasion. For example, after merging with an upstream 
input supplier, a downstream electric utility's input purchases would 
be ``internal'' to the firm. The merger, therefore, may create the 
incentive for the merging upstream input supplier to inflate the 
transfer prices of inputs sold to the downstream regulated utility to 
the extent it can evade regulatory scrutiny. Profits would increase for 
the vertically-integrated firm as a result of such a strategy but would 
accrue to the unregulated affiliate. Higher electricity prices could 
result from such a strategy.
    The Commission notes that regulatory evasion is a behavior that 
potentially affects retail electricity prices.\60\ Consistent with our 
position taken in the Merger Policy Statement, the Commission does not 
propose to address regulatory evasion concerns that affect retail 
electricity prices unless specifically asked to do so by a state 
regulatory authority.\61\
---------------------------------------------------------------------------

    \60\ Regulatory evasion could affect requirements service 
customers in wholesale electricity markets. However, we believe this 
is less likely to be a concern if wholesale markets are competitive.
    \61\ Policy Statement at 30,128.
---------------------------------------------------------------------------

    We also solicit comment on our proposed treatment of mergers in 
which regulatory evasion may be a concern, and how ongoing changes in 
the industry, such as ISO development and retail access, might affect 
our proposed approach.
    b. Products supplied by the upstream merging firm are used to 
produce a de minimis amount of the relevant downstream products. As 
discussed earlier, the Commission is proposing certain instances under 
which only minimal information and analysis would be necessary to 
confirm that a vertical merger poses no competitive concern. One such 
instance is when the upstream merging firm sells a product that is used 
to produce only a de minimis amount of the relevant product in the 
downstream geographic market.
    The Commission expects that vertical consolidations that fall into 
this category will be relatively easy to identify. We therefore propose 
that applicants would need to supply only minimal information to make 
an affirmative showing that a vertical merger does not require further 
analysis in order to determine if it would have an adverse effect on 
competition in downstream electricity markets.
    If the products sold by the upstream merging firm are used to 
produce a de minimis amount of the relevant products in the downstream 
geographic market, a vertical merger should pose no competitive 
concern.\62\ An example is when the upstream merging firm supplies gas 
transportation but almost all of the energy in the downstream market is 
produced from coal-fired generating capacity.
---------------------------------------------------------------------------

    \62\ See, Duke/PanEnergy, 79 FERC, para. 61,236 at 62,039.
---------------------------------------------------------------------------

    The Commission proposes that applicants desiring to make such a 
showing would have to: identify products sold by the upstream and 
downstream merging firms and identify the suppliers (by type of 
generation, e.g., gas-fired, coal-fired, that could compete with the 
downstream merging firm in providing downstream products. The second 
part of this analysis, that is, identifying the downstream suppliers, 
is necessary to determine whether customers affected by the merger 
could potentially turn to alternative suppliers in the event of a post-
merger price increase. The Commission proposes that applicants may 
provide an approximate definition of the downstream geographic market. 
At this time, we will not propose thresholds for the proportion of 
output in the downstream geographic market that is accounted for by the 
inputs sold by the upstream merging firm or other ``bright line'' tests 
for such de minimis determinations.
    c. The upstream merging firm does not sell products in the 
geographic market in which the downstream merging firm resides. A 
vertical merger involving an upstream firm that does not sell into the 
downstream geographic market would not affect competition in that 
market. Such a merger would involve an electric utility in a different 
geographic market from that served by the upstream firm and would raise 
no competitive concerns.
    The Commission proposes that applicants desiring to make such a 
showing would have to identify: (1) Products sold by the upstream and 
downstream merging firms; and (2) downstream suppliers who purchase 
inputs from the upstream merging firm and determine if those customers 
compete with the downstream merging firm to supply downstream products. 
The second part of this analysis, that is, identifying the downstream 
suppliers, is necessary to determine whether customers affected by the 
merger could potentially turn to alternative suppliers in the event of 
a post-merger price increase. The Commission proposes that applicants 
could provide an approximate definition of the downstream geographic 
market.
    For both of these abbreviated showings, applicants should explain, 
justify and document their analyses and provide all supporting data and 
documentation. The abbreviated filing requirements are set forth in 
Sec. 33.2(g)(2)(ii) of the proposed regulations. We solicit comments: 
on the reasonableness and efficacy of the proposed abbreviated filing 
requirements provisions; approaches to approximating the downstream 
geographic market; and appropriate de minimis thresholds for the amount 
of downstream output produced by inputs sold by the upstream merging 
firm.
    d. Components of the Analytic Framework. Described in more detail 
below are the components of the proposed analytic framework for 
vertical mergers.

[[Page 20351]]

1. Relevant Products
a. Downstream Market
    Applicants must identify and define the relevant products sold in 
the downstream electricity market affected by the business activity of 
the upstream merging firm. The proposed requirement for this aspect of 
the vertical analytic framework is the same as that proposed for the 
horizontal screen analysis, as set forth in Sec. 33.3(c)(1) of the 
proposed regulations. We seek comments on how, if at all, our proposed 
approach for defining relevant products in the downstream market should 
differ from that required for horizontal mergers. We also seek comments 
on any alternative approaches.
b. Upstream Market
    Applicants must identify the products produced by the upstream 
merging firm and used by the downstream merging firm and/or its 
competitors in the production of relevant downstream electricity 
products. Relevant upstream products could be grouped together when 
they are good substitutes for each other from the buyer's perspective. 
Also, the supply and demand conditions might vary over time, creating 
discrete, time-differentiated products.
    Accordingly, the relevant products identified by the applicant 
should be fully explained, justified and documented. The specific 
filing requirements for identifying and defining relevant upstream 
products are set out in Sec. 33.4(c)(1)(ii) of the proposed 
regulations. The Commission seeks comments on the proposed approach and 
any alternative approaches to defining relevant input products, and how 
such approaches should vary for different types of inputs.
2. Relevant Geographic Markets
a. Downstream Market
    Defining the downstream geographic market consists of identifying 
the customers potentially affected by the merger and the suppliers that 
can compete with the merging firm to supply a relevant electricity 
product. In the proposed regulations for the horizontal screen 
analysis, relevant geographic electricity markets are defined using the 
delivered price test. Under the delivered price test, a supplier would 
be considered in the market if it has generating capacity from which 
energy can be made available and delivered to the market at a price, 
including transmission and ancillary services, no more than five 
percent above the market price.
    The Commission proposes that the relevant downstream geographic 
market in a vertical merger would be defined similarly, as set out in 
Sec. 33.3(c)(3) of the proposed regulations for the horizontal analytic 
framework. However, we seek comment on the appropriateness of a 
delivered price test analysis for analyzing downstream markets in 
vertical mergers. We also solicit comments on any alternative 
approaches to defining downstream geographic markets in a vertical 
merger context.
b. Upstream market
    The Commission will not at this time propose precise filing 
requirements for defining upstream geographic markets. One reason is 
that the Commission has not yet acted upon an application for a merger 
with vertical aspects that required a rigorous definition of the 
upstream geographic market. Another reason is that the types of 
analysis and data needed to define geographic upstream markets may vary 
from input to input. The Commission expects to better understand the 
data and analysis needed to define geographic input markets--if such 
analysis proves necessary--as we evaluate proposed vertical mergers.
    Until such time, the Commission is proposing that applicants would 
approximate the upstream geographic market for each relevant upstream 
product and submit data and documentation necessary to support their 
analysis. Such approximate definitions of the upstream geographic 
market could be based, perhaps, on historical trade data. Applicants 
should define the smallest reasonable geographic markets.
    Applicants should fully explain, justify and document their 
analysis, including all supporting data and documentation. The filing 
requirements for this aspect of the analytic framework are set forth in 
Sec. 33.4(c)(2) of the proposed regulations. We seek comment on 
appropriate approaches to defining upstream geographic markets in 
vertical mergers.
3. Evaluating Competitive Conditions in Geographic Markets
a. Downstream Market
    Once the downstream geographic market has been defined, applicants 
would assess competitive conditions in the downstream market. To do so, 
applicants would calculate market shares for the suppliers identified 
in the delivered price test and downstream market concentration using 
the HHI statistic.
    The Commission proposes that for a vertical merger, downstream 
market share statistics reflect the ability of buyers in the downstream 
market to switch--in response to a price increase--from generation 
served by the upstream merging firm. Specifically, we propose that 
applicants would identify the upstream suppliers who sell or deliver 
inputs to each generating unit or plant in the downstream geographic 
market. All generation capacity served by the same input supplier would 
be considered together and therefore be given a market share, i.e., 
treated as if it was owned or controlled by a single firm.\63\
---------------------------------------------------------------------------

    \63\ See Enova, 79 FERC para. 61,372 at 62,562. If multiple 
upstream suppliers serve a single generating plant or unit, 
applicant's analysis would take this into account.
---------------------------------------------------------------------------

    The Commission proposes that applicants calculate downstream market 
concentration using the HHI statistic. While the Commission has not 
explicitly reported HHI statistics for relevant geographic markets in 
prior vertical merger cases, the HHI statistic is, along with market 
share, a generally accepted indicator of competitive conditions in a 
relevant market.\64\ As a general matter, therefore, the Commission 
proposes that markets that are ``highly concentrated'' under the 
Guidelines standard (i.e., an HHI of 1800 or above) are considered to 
be conducive to the exercise of market power and therefore should 
warrant additional analysis.\65\
---------------------------------------------------------------------------

    \64\ The DOJ 1984 Merger Guidelines address vertical mergers and 
discuss both market share and HHI statistics. See DOJ 1984 Merger 
Guidelines at 46.
    \65\ The DOJ 1984 Merger Guidelines use as a threshold for 
further investigating the competitive effect of a vertical merger a 
``highly concentrated'' market. See DOJ 1984 Merger Guidelines at 
46. Because concentration thresholds are indicators of cases in 
which additional investigation into the possibility of competitive 
harm might be warranted, the Commission would look further at 
mergers with an HHI near 1800 or above.
---------------------------------------------------------------------------

    The specific filing requirements for assessing the competitive 
conditions in the downstream market are set forth in Sec. 33.4(c)(3)(i) 
of the proposed regulations. We solicit comments on this approach to 
assessing market shares and concentration in the downstream market, and 
any alternative approaches.
b. Upstream Market
    The Commission proposes that Applicants would assess competitive 
conditions in the upstream market by calculating market shares for each 
supplier identified in the delivered price test and market 
concentration using the HHI statistic. The Commission proposes that 
upstream geographic markets that are ``highly concentrated''

[[Page 20352]]

under the Guidelines standard (i.e., an HHI of 1800 or above) are 
considered to be conducive to the exercise of market power and 
therefore should warrant additional analysis.
    The specific filing requirements for assessing the competitive 
conditions in the upstream market are set forth in Sec. 33.4(c)(3)(ii) 
of the proposed requirements. We solicit comments on this approach to 
assessing market shares and concentration in the upstream market, and 
any alternative approaches.
4. Mitigation Measures and Analysis of Other Factors
    Where applicants' analysis indicates concentration results that 
raise concerns regarding the competitive effect of the merger, the 
Commission proposes that applicants would evaluate additional factors 
that could provide insight into whether a proposed merger would be 
likely to harm competition in electricity markets. Applicants need 
evaluate these factors only if competitive conditions in the upstream 
and downstream markets support the possibility that the merger could 
raise rivals' costs or facilitate coordination, as described in the 
following sections. In lieu of addressing the additional factors that 
would lessen concern regarding the adverse competitive impact of a 
proposed merger, applicants may propose mitigation measures. Proposals 
must be specific, and the applicant must demonstrate that proposed 
measures adequately mitigate any adverse effects of the merger.
    If applicants choose not to propose mitigation, the factors that we 
propose applicants evaluate in this stage of the analytic framework are 
those set out in Sections 2 through 5 of the Guidelines: potential 
adverse competitive effects, ease of entry, merger-related 
efficiencies, and whether one of the merging firm's assets would exit 
the market, but for the merger. The second, third and fourth of these 
factors (entry, merger-related efficiencies and a failing firm 
rationale) can counteract any potential competitive harm indicated by 
market share and concentration statistics. Regarding entry, the 
Commission seeks comments on the circumstances under which entry into 
either the upstream or downstream markets would be sufficient to 
mitigate the potential competitive harm of a proposed merger and the 
circumstances under which entry into both markets would be 
necessary.\66\ The first of these factors looks more specifically at 
the circumstances under which potential adverse competitive effects 
would materialize. Below, we discuss the proposed requirements for 
evaluating such circumstances for mergers posing foreclosure/raising 
rivals' costs and anticompetitive coordination concerns.
---------------------------------------------------------------------------

    \66\ See DOJ 1984 Merger Guidelines Secs. 4.211 and 4.212.
---------------------------------------------------------------------------

a. Foreclosure/Raising Rivals' Costs
    If both the upstream and downstream markets are conducive to the 
exercise of market power, there is the potential for the merger to harm 
competition in the downstream geographic market by raising the input 
costs of rival downstream suppliers. As such, we propose that 
applicants demonstrate that raising rivals' costs would be difficult, 
even if the merger creates or enhances the ability of the merged firm 
to adversely affect prices or output in the downstream market.
    For example, we propose that applicants provide adequate 
information, supported by data and documentation, regarding how the 
merged firm could raise its rivals' costs. We propose that such 
information could include, but is not limited to: (1) Types of products 
or services sold by the upstream firm to each downstream competitor; 
(2) terms of contracts under which products or services are sold and 
the duration of such contracts; (3) a description of the prices, 
availability quality and input delivery points of inputs sold to 
downstream competitors; and (4) information on generation unit 
scheduling, impending technological improvements, and marketing that is 
provided by customers to the upstream firm, particularly any market-
sensitive information that may be subject to confidentiality 
provisions.\67\ We seek comment on how such data can be made available 
to intervenors under protective order procedures.
---------------------------------------------------------------------------

    \67\ See, Vastar Resources, Inc., et al., 81 FERC para. 61,135 
at 61,633.
---------------------------------------------------------------------------

    We also propose that applicants would evaluate whether customers of 
the upstream input supplier can readily switch to alternative inputs to 
avoid a price increase by the upstream merging firm. If switching to 
alternative inputs is possible, the merger may not create or enhance 
the ability of the merging firm to affect output and prices in the 
upstream market.
    We propose that applicants would have to provide data and 
documentation supporting how regulatory requirements governing the 
conduct of upstream input suppliers (such as open-access provisions 
applicable to gas pipelines under Order No. 636) \68\ could counteract 
any competitive harm posed by a merger.
---------------------------------------------------------------------------

    \68\ See Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation Under Part 
284 of the Commission's Regulations, and Regulation of Natural Gas 
After Partial Wellhead Decontrol, Order No. 636, FERC Stats. and 
Regs. para. 30,939 (April 8, 1992), order on reh'g, Order No. 636-A, 
FERC Stats. & Regs. para. 30,950 (August 2, 1992), order on reh'g, 
Order No. 636-B, 61 FERC para. 61,272 (November 27, 1992), reh'g 
denied, Order No. 636-C, 62 FERC para. 61,007 (January 8, 1993), 
order aff'd in part and remanded in part, United Distribution 
Companies, v. FERC, 88 F.3d 1105 (D.C. Cir. 1996); order on remand, 
Order No. 636-C, 78 FERC para. 61,186 (1997); rehearing pending.
---------------------------------------------------------------------------

    Finally, a raising rivals' costs strategy is unlikely to harm 
competition unless such behavior is profitable. Therefore, we propose 
that applicants would provide data and documentation supporting an 
assessment of the profitability of a raising rivals' costs strategy if 
this data could materially affect a conclusion that a proposed merger 
could harm competition.
    The filing requirements for this aspect of the analytic framework 
are set forth in Sec. 33.2(g)(4) of the proposed regulations. The 
Commission seeks comment on the foregoing, and other pertinent 
considerations that may materially affect a finding that a proposed 
vertical merger would be likely to impair competition in electricity 
markets and how such considerations should be analyzed.
b. Facilitating Anticompetitive Coordination
    There is a possibility that a vertical merger could harm 
competition in the downstream market by facilitating anticompetitive 
coordination in either the upstream or downstream market. As discussed 
earlier, whether anticompetitive coordination results in higher 
electricity prices or lower output depends on the competitive 
conditions in the upstream and downstream geographic markets. However, 
since we have not described the ways in which a vertical merger could 
facilitate coordination, it would be premature to specify the market 
conditions under which increased coordination would warrant applicants 
proceeding to evaluate additional factors.
    Therefore, we solicit comments on how a vertical merger could 
facilitate anticompetitive coordination; the conditions under which 
such coordination would impair competition in electricity markets; and 
the significance of coordination problems as they relate to the 
industries likely to be affected by the vertical mergers in which the 
Commission would take an interest.
5. Remedy
    In the event a vertical merger poses competitive concerns after 
accounting

[[Page 20353]]

for the additional factors described in the previous section, the 
Commission proposes that the merger may be made acceptable if certain 
remedial actions are taken. For example, in Enova the Commission 
specified certain remedies that would address the competitive concerns 
presented by that merger. The remedies included a code of conduct, 
restrictions on affiliate transactions and an electronic gas 
reservation and information system.69 We solicit comments on 
the types of remedial action that would effectively address such 
competitive concerns.
---------------------------------------------------------------------------

    \69\ Enova, 79 FERC para. 61,372 at 62,565 (1997).
---------------------------------------------------------------------------

3. Effect on Rates--Proposed Requirements for Ratepayer Protections
    The Commission has previously determined that ratepayer protection 
mechanisms are necessary to protect the wholesale customers of merger 
applicants (e.g., open seasons to allow early termination of existing 
service contracts or rate freezes) if the contemplated benefits of the 
merger do not materialize. If the proposed merger raises substantial 
issues of fact with regard to its impact on rates, the Commission has 
stated that it will consider further investigation of the matter or set 
it for hearing.70 Therefore, all merger applicants would be 
required to demonstrate how wholesale ratepayers will be protected, and 
applicants would have the burden of proving that their proposed 
ratepayer protections are adequate. Specifically, each proposed 
ratepayer protection mechanism would clearly identify what customer 
groups are covered (e.g., requirements customers, transmission 
customers, formula rate customers), what types of costs are covered, 
and the time period for which the protection will apply. This 
information should be included in the applicants' explanation of the 
effect of the transaction on rates required in Sec. 33.2(g)(i) of the 
proposed regulations.
---------------------------------------------------------------------------

    \70\ Policy Statement at 30,111, 30,121-24, and n.5. See also, 
Morgan Stanley, 79 FERC at 61,504-05; Duke/PanEnergy, 79 FERC at 
62,039-41; Enova, 79 FERC at 62,566; Destec, 79 FERC at 62,574-75; 
LILCO, 80 FERC at 61,079-80; FirstEnergy, 80 FERC at 61,098; NORAM, 
80 FERC at 61,382-8-12.
---------------------------------------------------------------------------

4. Effect on Regulation--Proposed Requirements Concerning the Impact on 
State and Commission Regulatory Jurisdiction
    The Commission has previously stated that, in merger filings 
involving public utility subsidiaries of registered holding companies, 
applicants must either commit to abide by the Commission's policies 
with respect to intra-system transactions within the holding company 
structure or be prepared to go to hearing on the issue of the effect of 
the proposed registered holding company structure on effective 
regulation by the Commission.71 Consistent with this policy, 
we propose that, for all merger applications involving public utility 
subsidiaries of registered holding companies, applicants include such a 
commitment.
---------------------------------------------------------------------------

    \71\ Policy Statement at 30,112 and 30,124-25. See also, Duke/
PanEnergy, 79 FERC at 61,041-42; Morgan Stanley, 79 FERC at 61,505; 
Enova, 79 FERC at 62,566-67; Destec, 79 FERC at 62,575; LILCO, 80 
FERC at 61,080; FirstEnergy, 80 FERC at 61,098-99; NORAM, 80 FERC at 
61,383; and Delmarva, 80 FERC at 61,412-13 and n.60.
---------------------------------------------------------------------------

    Since regulatory evasion can also result, for example, from passing 
higher input prices through to the retail customers of a regulated 
affiliate, we further propose that merger applicants, in all cases, 
state whether the affected state commissions have authority to act on 
the proposed merger. Where the affected state commissions have such 
authority, the Commission would not set for further investigation or 
hearing the matter of whether the transaction will impair effective 
regulation by the affected state commissions. However, if the affected 
state lacks authority over the merger and raises concerns about the 
effect on regulation, we will consider, on a case-by-case basis, 
whether to set this issue for hearing.72 This information 
should be included in the applicants' explanation of the effect of the 
transaction on regulation required in Sec. 33.2(g)(1) of the proposed 
regulations.
---------------------------------------------------------------------------

    \72\ Policy Statement at 30,125.
---------------------------------------------------------------------------

D. Emerging Issues

1. Computer Modeling
    The use of computer models--specifically, computer programs used to 
simulate the electric power market--has been raised in comments on the 
Policy Statement and also in specific cases. In comments on the Policy 
Statement, DOJ recommended using computer simulations to delineate 
markets and also noted that these simulations could be helpful in 
gauging the market power of the merged firm.73 The 
Commission believes that use of a properly structured computer model 
could account for important physical and economic effects in an 
analysis of mergers and may be a valuable tool to use in a horizontal 
screen analysis. For example, a computer model might prove particularly 
useful in identifying the suppliers in the geographic market that are 
capable of competing with the merged company. It could provide a 
framework to help ensure consistency in the treatment of the data used 
in identifying suppliers in a geographic market.
---------------------------------------------------------------------------

    \73\ Appendix to DOJ Merger NOI Comments at A-11, n12.
---------------------------------------------------------------------------

    Therefore, we are issuing a notice of request for written comments 
and intent to convene a technical conference concurrently with this 
NOPR. This notice requests comments on the use of computer models in 
merger analysis and intends to convene a public conference to discuss 
this matter. As more fully explained in the notice, the purpose of this 
inquiry is to gain further input and insight into whether and how 
computer models can be useful to our competitive screen analysis set 
forth in Appendix A of the Policy Statement.
2. Other Emerging Issues
    The 1996 Policy Statement primarily addresses horizontal mergers, 
but shortly after it was adopted a number of vertical electric-gas 
mergers were filed with the Commission. For this reason, we request 
comments now on whether we should expect other new types of corporate 
groupings involving public utilities to emerge, what form they might 
take, and how we should analyze the competitive effects if such 
combinations are in fact presented. We seek comments on new kinds of 
mergers that may lead to the blurring of traditional utility services 
and other business lines. Should our market concentration analysis 
extend to new products that may result from such a convergence of 
business lines, even if these products are principally concerned with 
end-use markets? For example, a combination involving a public utility 
and a telecommunication business could offer new products and services, 
such as sophisticated interactive electric metering, real-time pricing, 
automatic utility control of customer machinery and appliances to 
minimize electricity costs, and computerized shopping for the most 
economical power supplier. Are our proposed vertical merger filing 
requirements adequate for review of this form of public utility merger, 
to the extent such mergers are jurisdictional?
    We also request comment on how the structural changes occurring in 
the electric industry should be considered in our analysis of the 
effect that public utility mergers may have on competition. For 
example, the Commission is aware that as retail markets evolve into 
regional power markets, it may become more difficult for individual 
states to adequately examine a merger's impact on such

[[Page 20354]]

regional markets.74 We seek comment on whether it is 
feasible to address competition only at the wholesale level and ignore 
changes in the market that arise in the context of state retail choice 
programs and transform retail franchise service territories into 
multistate supplier markets. Where merger applicants are members of a 
multistate ISO or regional power exchange, should we modify our 
analysis and criteria and, if so, how?
---------------------------------------------------------------------------

    \74\ See, Atlantic City/Delmarva, 81 FERC 61,173 at 61,755 
(1997).
---------------------------------------------------------------------------

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) 75 requires that 
rulemakings contain either a description and analysis of the effect the 
proposed rule will have on small entities, or a certification that the 
rule will not have a substantial economic effect on a substantial 
number of small entities. The entities that would be required to comply 
with the proposed rule are public utilities disposing of jurisdictional 
facilities, merging such facilities with such facilities owned by 
another person, or acquiring the securities of another public utility. 
These entities do not fall within the RFA's definition of small 
entities.76 Thus, the Commission certifies that this rule 
will not have a ``significant economic impact on a substantial number 
of small entities.''
---------------------------------------------------------------------------

    \75\ 5 U.S.C. 601-612.
    \76\ 5 U.S.C. 601(3) (citing Sec. 3 of the Small Business Act, 
15 U.S.C. 632). Section 3 of the Small Business Act defines a 
``small-business concern'' as a business which is independently 
owned and operated and which is not dominant in its field of 
operation. 15 U.S.C. 632(a).
---------------------------------------------------------------------------

V. Environmental Statement

    The Commission concludes that promulgating the proposed rule would 
not represent a major federal action having a significant adverse 
impact on the human environment under the Commission's regulations 
implementing the National Environment Policy Act.77 The 
proposed rule falls within the categorical exemption provided in the 
Commission's regulations for approval of actions under Secs. 4(b), 203, 
204, 301, 304, and 305 of the Federal Power Act relating to issuance 
and purchase of securities, acquisition or disposition of property, 
merger, interlocking directorates, jurisdictional determinations and 
accounting.78 Consequently, neither an environmental 
assessment nor an environmental impact statement is required.
---------------------------------------------------------------------------

    \77\ 18 CFR Part 380.
    \78\ 18 CFR 380.4(a)(16).
---------------------------------------------------------------------------

VI. Information Collection Statement

    The following collection of information contained in this proposed 
rule has been submitted to the Office of Management and Budget for 
review under Sec. 3507(d) of the Paperwork Reduction Act of 1995, 44 
U.S.C. 3507(d). Comments are solicited on the Commission's need for 
this information, whether the information will have practical utility, 
the accuracy of the provided burden estimates, ways to enhance the 
quality, utility, and clarity of the information to be collected, and 
any suggested methods for minimizing respondents' burden, including the 
use of automated information techniques.
    Estimated Annual Burden:

----------------------------------------------------------------------------------------------------------------
                                                 Number of        Number of        Hours per       Total annual 
               Data collection                  respondents       responses         response          hours     
----------------------------------------------------------------------------------------------------------------
FERC-519....................................             100                1               80            8,000 
----------------------------------------------------------------------------------------------------------------

    Total Annual Hours for Collection:
(Reporting + Recordkeeping, (if appropriate)) = 8,000
    Although most of the discussion in this document focuses mainly on 
the Commission's merger policy, the NOPR does address the filing 
requirements for all data filed under the FERC-519 form. This data 
collection is relevant to a small number of mergers as well as numerous 
less complex corporate applications. The hours per response is a 
weighted average time estimate based on the projected number of merger 
filings and other corporate applications.
    Information Collection costs: The Commission seeks comments on the 
costs to comply with these requirements. It has projected the average 
annualized cost per respondent to be the following:

                    Annualized Capital/Startup Costs                    
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Annualized Costs (Operations & Maintenance)................    $4,210.31
                                                            ------------
    Total Annualized Costs.................................     4,210.31
------------------------------------------------------------------------

    The Office of Management and Budget's (OMB) regulations,\79\ 
require OMB to approve certain information collection requirements 
imposed by agency rule. The Commission is submitting notification of 
this proposed rule to OMB.
---------------------------------------------------------------------------

    \79\ 5 CFR 1320.11 (1996).
---------------------------------------------------------------------------

    Title: FERC-519, Disposition of Facilities, Mergers and Acquisition 
of Securities.
    Action: Proposed collection.
    OMB Control No.: 1902-0082.
    Respondents: Business or other for profit, including small 
business.
    Frequency of Responses: On occasion.
    Necessity of the information: The proposed rule revises the 
requirements contained in 18 CFR Part 33 which implements Sec. 203 of 
the FPA. This proposed rule revises 18 CFR Part 33 by providing 
applicants with more detailed guidance for preparing applications and 
is consistent with the policies set forth in the Policy Statement. The 
proposed rule is intended to lessen regulatory burdens on the industry 
by eliminating outdated and unnecessary filing requirements, clarifying 
existing requirements, and streamlining the filing requirements for 
mergers that do not raise competitive concerns.
    The implementation of these proposed filing requirements will help 
the Commission carry out its responsibilities under the FPA in 
accordance with the objectives of the Commission's Open Access Rule 
\80\ and in consideration of the changing market structures in the 
electric industry. The Commission will use the data received as a 
result of the proposed filing requirements: (1) In the review of the 
proposed merger of jurisdictional facilities to ascertain whether the 
merger is in the public interest; (2) for general industry oversight; 
and (3) to expedite the corporate application review process.
---------------------------------------------------------------------------

    \80\ See Promoting Wholesale Competition Through Open Access 
Non-Discriminatory Transmission Services by Public Utilities; 
Recovery of Stranded Costs by Public Utilities, Order No. 888, 61 
Fed. Reg. 21,540 (May 10, 1996), FERC Stats. & Regs. para. 31,036 
(1996), order on reh'g, Order 888-A, 62 Fed. Reg. 12,274 (March 14, 
1997), FERC Stats. & Regs. para. 31,048 (1997), order on reh'g, 
Order 888-B, 81 FERC para. 61,248 (1997).
---------------------------------------------------------------------------

    Internal Review: The Commission has reviewed the requirements 
pertaining to the merger of jurisdictional facilities of public 
utilities and determined that the proposed revisions are necessary 
because of continuing changes in the electric power industry. Requiring 
such filing information, as set forth in this NOPR, would assist the 
Commission in

[[Page 20355]]

determining whether proposed mergers are consistent with the 
competitive goals of the FPA, the Energy Policy Act of 1992 \81\ and 
the Commission's Open Access Rule. These requirements conform to the 
Commission's plan for efficient information collection, communication, 
and management within the electric power industry. The Commission has 
assured itself, by means of its internal review, that there is 
specific, objective support for the burden estimates associated with 
the information requirements.
---------------------------------------------------------------------------

    \81\ Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat. 
2776, 2905 (1992).
---------------------------------------------------------------------------

    Interested persons may obtain information on the reporting 
requirements by contacting the following: Federal Energy Regulatory 
Commission, 888 First Street, N.E., Washington, D.C. 20426, [Attention: 
Michael Miller, Division of Information Services, Phone: (202) 208-
1415, fax: (202) 273-0873, email:[email protected]].
    For submitting comments concerning the collection of information(s) 
and the associated burden estimate(s), please send your comments to the 
contact listed above and to the Office of Management and Budget, Office 
of Information and Regulatory Affairs, Washington, D.C. 20503 
[Attention: Desk Officer for the Federal Energy Regulatory Commission, 
phone: (202) 395-3087, fax: (202) 395-7285].

VII. Public Comment Procedures

    The Commission invites comments on the proposed rule from 
interested persons. An original and 14 copies of written comments on 
the proposed rule must be filed with the Commission no later than 
August 24, 1998.
    In addition, commenters are requested to submit a copy of their 
comments on a 3\1/2\ inch diskette formatted for MS-DOS based 
computers. In light of our ability to translate MS-DOS based materials, 
the text need only be submitted in the format and version that it was 
generated (i.e., MS Word, WordPerfect, ASCII, etc.). It is not 
necessary to reformat word processor generated text to ASCII. For 
Macintosh users, it would be helpful to save the documents in Macintosh 
word processor format and then write them to files on a diskette 
formatted for MS-DOS machines. All comments should be submitted to the 
Office of the Secretary, Federal Energy Regulatory Commission, 888 
First Street, NE, Washington, DC 20426, and should refer to Docket No. 
RM98-4-000.
    All written comments will be placed in the Commission's public 
files and will be available for inspection in the Commission's public 
reference room at 888 First Street, NE, Washington, DC, 20426, during 
business hours.

List of Subjects in 18 CFR Part 33

    Electric utilities, Reporting and recordkeeping requirements, 
Securities.

    By the Commission.
Linwood A. Watson, Jr.,
Acting Secretary.

    In consideration of the foregoing, the Commission proposes to 
revise Part 33, Chapter I, Title 18 of the Code of Federal Regulations, 
as set forth below.

PART 33--APPLICATION FOR ACQUISITION, SALE, LEASE, OR OTHER 
DISPOSITION, MERGER OR CONSOLIDATION OF FACILITIES, OR FOR PURCHASE 
OR ACQUISITION OF SECURITIES OF A PUBLIC UTILITY

Sec.
33.1  Applicability.
33.2  Contents of application--general information requirements.
33.3  Additional information requirements for applications resulting 
in a single corporate entity obtaining ownership or control over 
generating facilities of unaffiliated parties.
33.4  Additional information requirements for applications resulting 
in a single corporate entity obtaining ownership or control over 
businesses that provide inputs to electric generation and electric 
generation products that were previously unaffiliated.
33.5  Proposed accounting entries.
33.6  Form of notice.
33.7  Verification.
33.8  Number of copies.
33.9  Protective order.
33.10  Additional information requests by the Commission.

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.


Sec. 33.1  Applicability.

    The requirements of this part will apply to public utilities 
seeking authority for any transaction requiring Commission 
authorization under section 203 of the Federal Power Act.


Sec. 33.2  Contents of application--general information requirements.

    Each applicant shall include in its application, in the manner and 
form and in the order indicated, the following general information with 
respect to such applicant and each entity whose jurisdictional 
facilities or securities are involved:
    (a) The exact name of the applicant and its principal business 
address.
    (b) The name and address of the person authorized to receive 
notices and communications regarding the application, including phone 
and fax numbers, and E-mail address.
    (c) A description of the applicant, including:
    (1) All business activities of the applicant, including 
authorizations by charter or regulatory approval, even if not currently 
engaged in such activity;
    (2) Organizational charts depicting the applicant's current and 
proposed post-transaction corporate structures (including any pending 
authorized but not implemented changes) indicating all parent 
companies, subsidiaries, affiliates and associate companies, unless the 
applicant demonstrates that the proposed transaction does not affect 
the corporate structure of any party to the transaction;
    (3) A description of all joint ventures, strategic alliances, or 
other business arrangements to which the applicant or its parent 
companies, subsidiaries, affiliates and associate companies is a party, 
unless the applicant demonstrates that the proposed transaction does 
not affect any of its business interests;
    (4) The identity of common officers or directors of parties to the 
proposed transaction;
    (5) A description of any authorizations, licenses, or other 
approvals received from the Commission; and
    (6) A description and location of wholesale power sales customers 
and unbundled transmission services customers served by the applicant 
or its parent companies, subsidiaries, affiliates and associate 
companies.
    (d) A description of jurisdictional facilities owned, operated, or 
controlled by the applicant or its parent companies, subsidiaries, 
affiliates, and associate companies.
    (e) A narrative description of the proposed transaction for which 
Commission authorization is requested, including:
    (1) The identity of all parties involved in the transaction;
    (2) All jurisdictional facilities and securities associated with or 
affected by the transaction;
    (3) The consideration for the transaction; and
    (4) The effect of the transaction on such jurisdictional facilities 
and securities.
    (f) All contracts related to the proposed transaction together with 
copies of all other written instruments entered into or proposed to be 
entered into by the parties to the transaction.
    (g) A statement explaining the facts relied upon to demonstrate 
that the proposed transaction is consistent with the public interest. 
The applicant must

[[Page 20356]]

include a general explanation of the effect of the transaction on:
    (1) Competition;
    (2) Rates; and
    (3) Regulation of the applicant by the Commission and state 
commissions with jurisdiction over any party to the transaction. The 
applicant should also file any other information it believes relevant 
to the Commission's consideration of the transaction.
    (h) If the proposed transaction involves physical property of any 
party, the applicant must provide a general or key map showing in 
different colors the properties of each party to the transaction.
    (i) If the applicant is required to obtain licenses, orders, or 
other approvals from other regulatory bodies in connection with the 
proposed transaction, the applicant must identify the regulatory bodies 
and indicate the status of other regulatory actions, and provide a copy 
of each order of those regulatory bodies that relates to the proposed 
transaction.


Sec. 33.3  Additional information requirements for applications 
resulting in a single corporate entity obtaining ownership or control 
over generating facilities of unaffiliated parties.

    (a) If, as a result of the proposed transaction, a single corporate 
entity obtains ownership or control over the generating facilities of 
two or more of the previously unaffiliated parties to the transaction 
or their parent companies, subsidiaries, affiliates and associate 
companies (collectively merging entities), the applicant must file the 
horizontal Competitive Screen Analysis described in paragraphs (b), 
(c), (d), (e) and (f) of this section, unless the applicant 
affirmatively demonstrates that:
    (1) The merging entities do not conduct business in the same 
geographic markets or
    (2) The extent of the business transactions in the same geographic 
markets is de minimis.
    (b) All data, assumptions, techniques and conclusions in the 
horizontal Competitive Screen Analysis must be accompanied by 
appropriate documentation and support.
    (1) If the applicant is unable to provide any specific data 
required for this section, it must identify and explain how the 
requested data submission was satisfied and the suitability of the 
substitute data.
    (2) The applicant may provide other analyses in addition to the 
horizontal Competitive Screen Analysis.
    (3) The applicant may use a computer model to complete one or more 
steps in the horizontal Competitive Screen Analysis. The applicant must 
fully explain, justify and document any model used and provide 
descriptions of model formulation, mathematical specifications, 
solution algorithms, as well as the annotated model code, and any 
software needed to execute the model. The applicant must explain and 
document how inputs were developed, the assumptions underlying such 
inputs and any adjustments made to published data that are used as 
inputs. The applicant must also explain how it tested the predictive 
value of the model, for example, using historical data.
    (c) The horizontal Competitive Screen Analysis must be completed 
using the following steps:
    (1) Define relevant products. Identify and define all wholesale 
electricity products sold by the merging entities during the two years 
prior to the date of the merger application, including but not limited 
to: non-firm energy, short-term capacity (or firm energy), and long-
term capacity (a contractual commitment of more than one year). If 
supply and demand conditions for a product vary substantially between 
time periods, those periods must be identified by time of day and/or 
load level, and analyzed separately.
    (2) Identify destination markets. Identify each wholesale power 
sales customer or set of customers (destination market) affected by the 
proposed transaction. Affected customers are, at a minimum, those 
entities directly interconnected to any of the merging entities. 
Affected customers also should include those entities that have 
purchased electricity at wholesale from any of the merging entities 
during the two years prior to the date of the application. If the 
applicant does not identify an entity to whom the merging entities have 
sold electricity during the last two years as an affected customer, the 
applicant must provide a full explanation for each such exclusion.
    (3) Identify potential suppliers. A seller may be included in a 
geographic market to the extent that it can economically and physically 
deliver generation services to the destination market. The applicant 
must identify potential suppliers to each destination market using the 
delivered price test.
    (i) Delivered price test. For each destination market, the 
applicant must calculate the amount of relevant product a potential 
supplier could deliver to the destination market from owned or 
controlled capacity at a price, including applicable transmission and 
ancillary services costs, that is no more than five (5) percent above 
the pre-transaction market clearing price in the destination market.
    (ii) The applicant must measure each potential supplier's presence 
in the destination market in terms of generating capacity, using at 
least economic capacity and available economic capacity measures. 
Additional measures, such as total capacity, may be presented.
    (A) Economic capacity means the amount of generating capacity owned 
or controlled by a potential supplier with variable costs low enough 
that energy from such capacity could be economically delivered to the 
destination market. Prior to applying the delivered price test, the 
generating capacity meeting this definition must be adjusted by 
subtracting capacity that is committed under long-term firm sales 
contracts and adding capacity that is acquired under long-term firm 
purchase contracts (i.e., contracts with a remaining commitment of more 
than one year). In addition, any generating capacity of the potential 
supplier that is under the operational control of a third-party must be 
attributed to the party for whose economic benefit the capacity is 
operated; generating capacity may also be attributed to another 
supplier for other reasons deemed necessary, but the applicant must 
explain the reasons for doing so.
    (B) Available economic capacity means the amount of generating 
capacity meeting the definition of economic capacity less the amount of 
generating capacity needed to serve the potential supplier's native 
load, i.e., the capacity needed to serve wholesale and retail power 
customers on whose behalf the potential supplier, by statute, 
franchise, regulatory requirement, or contract, has undertaken an 
obligation to construct and operate its system to meet their reliable 
electricity needs.
    (C) Each potential supplier's economic capacity and available 
economic capacity (and any other measure used to determine the amount 
of relevant product that could be delivered to a destination market) 
must be adjusted to reflect available transmission capability to 
deliver each relevant product. The allocation to a potential supplier 
of limited capability of constrained transmission paths internal to the 
merging entities' systems or interconnecting the systems with other 
control areas must recognize both the transmission capability not 
subject to firm reservations by others and any firm transmission rights 
held by the potential supplier that are not committed to long-term 
transactions. For each such instance where limited transmission 
capability must be

[[Page 20357]]

allocated among potential suppliers, the applicant must explain the 
method used and show the results of such allocation.
    If the proposed transaction would cause an interface that 
interconnects the transmission systems of the merging entities to 
become transmission facilities for which the merging entities would 
have a native load priority under their open access transmission tariff 
for use of those facilities, all of the unreserved capability of the 
interface must be allocated to the merging entities for purposes of the 
horizontal Competitive Screen Analysis, unless the applicant 
demonstrates one of the following: the merging entities would not have 
adequate economic capacity to fully use such unreserved transmission 
capability; the merging entities have committed a portion of the 
interface capability to third parties; or suppliers other than the 
merging entities have purchased a portion of the interface capability.
    (4) Calculate market concentration. Using the amounts of generating 
capacity (i.e., economic capacity and available economic capacity, and 
any other relevant measure) determined in paragraph (c)(3) of this 
section, for each product in each destination market, the applicant 
must calculate the market share, both pre-and post-merger, for each 
potential supplier, the Herfindahl-Hirschman Index (HHI) statistic for 
the market, and the change in the HHI statistic. (The HHI statistic, 
which is a measure of market concentration and is a function of the 
number of firms in a market and their respective market shares, is 
calculated by summing the squares of the individual market shares, 
expressed as percentages, of all potential suppliers to the destination 
market.)
    (5) Historical transaction data. To corroborate the results of the 
horizontal Competitive Screen Analysis, the applicant must provide 
historical trade data and historical transmission data. Such data 
should cover the two-year period preceding the filing of the 
application. The applicant may adjust the results of the horizontal 
Competitive Screen Analysis, if supported by historical trade data or 
historical transmission service data. Any adjusted results must be 
shown separately together with an explanation of all adjustments to the 
results of the horizontal Competitive Screen Analysis.
    (d) Data to support the delivered price test. In support of the 
delivered price test required by paragraph (c)(3) of this section, the 
applicant must provide the following data and information used in 
calculating the economic capacity and available economic capacity that 
a potential supplier could deliver to a destination market. The 
transmission data required by paragraphs (d)(6) through (d)(8) of this 
section must be supplied for the merging entities' systems. Such 
transmission data must also be supplied for other relevant systems, to 
the extent data are publicly available.
    (1) Generation capacity and variable cost. For each generating 
plant or unit owned or controlled by each potential supplier, the 
applicant must provide: supplier name; name of the plant or unit; 
primary and secondary fuel-types; nameplate capacity; summer and winter 
total capacity; summer and winter capacity adjusted to reflect planned 
and forced outages and other factors, such as fuel supply and 
environmental restrictions; and variable cost components, including, at 
a minimum, variable operation and maintenance, including both fuel and 
non-fuel operation and maintenance, and environmental compliance. To 
the extent costs are allocated among units at the same plant, 
allocation methods must be fully described.
    (2) Long-term purchase and sales data. For each sale and purchase 
of capacity, the applicant must provide the following information: 
purchasing entity name; selling entity name; duration of the contract; 
provisions regarding renewal of the contract; priority or degree of 
interruptibility; FERC rate schedule number, if applicable; and 
quantity and price of capacity and/or energy purchased or sold under 
the contract.
    (3) Native load commitments (i.e., commitments to serve wholesale 
and retail power customers on whose behalf the potential supplier, by 
statute, franchise, regulatory requirement, or contract, has undertaken 
an obligation to construct and operate its system to meet their 
reliable electricity needs). For each time period, if time-
differentiated relevant products are analyzed, the applicant must 
provide: supplier name and hourly native load obligations for the most 
recent two years. If data on native load obligations are not available, 
the applicant must fully explain and justify any estimates of native 
load obligations.
    (4) Transmission and ancillary service prices, and loss factors. 
The applicant must use in the horizontal Competitive Screen Analysis 
the maximum rates stated in the transmission providers' tariffs. If 
necessary, those rates should be converted to a dollars-per-megawatt 
hour basis and the conversion method explained. If a regional 
transmission pricing regime is in effect that departs from system-
specific transmission rates, the analysis should reflect the regional 
pricing regime. The following data must be provided for each 
transmission system that would be used to deliver energy from each 
potential supplier to a destination market: supplier name; name of 
transmission system; firm point-to-point rate for each system; non-firm 
point-to-point rate; scheduling, system control and dispatch rate; 
reactive power/voltage control rate; and transmission loss factor.
    (5) Destination market price. The applicant must provide, for each 
relevant product and destination market, market prices for the time 
periods corresponding to the time-differentiated products being 
analyzed for the most recent two years. The applicant may provide 
suitable proxies for market clearing prices if actual market prices are 
unavailable. Estimated prices must be supported and the cost or sales 
data used to estimate the prices must be included with the application.
    (6) Transmission capability. The applicant must provide transfer 
capability data for each of the transmission paths, interfaces, or 
other facilities used by suppliers to deliver to the destination 
markets on an hourly basis for the most recent two years. The applicant 
must report simultaneous transfer capability, if it is available. 
Transmission capability data must include the following information: 
transmission path, interface, or facility name; total transfer 
capability (TTC); and firm available transmission capability (ATC).
    (7) Transmission constraints. For each existing transmission 
facility that affects supplies to the destination markets and that has 
been constrained during the most recent two years or is expected to be 
constrained within the planning horizon, the applicant must provide the 
following information: name of all paths, interfaces, or facilities 
affected by the constraint; locations of the constraint and all paths, 
interfaces, or facilities affected by the constraint; hours of the year 
when the transmission constraint is binding; and the system conditions 
under which the constraint is binding. The applicant must include 
information regarding expected changes in loadings on transmission 
facilities due to the proposed transaction and the consequent effect on 
transfer capability. To the extent possible, the applicant should 
provide system maps showing the location of transmission facilities 
where binding constraints have been known or are expected to occur.
    (8) Firm transmission rights. For each potential supplier to a 
destination market that holds firm transmission rights on a 
transmission path, interface,

[[Page 20358]]

or facility necessary to deliver energy from a potential supplier 
(including the supplier itself) to that market, the applicant must 
provide the following information: supplier name; name of transmission 
path interface, or facility; the FERC rate schedule number, if 
applicable, under which transmission service is provided; and a 
description of the firm transmission rights held (including, at a 
minimum, quantity and remaining time the rights will be held, and any 
relevant time restrictions on transmission use, such as peak or off-
peak rights).
    (9) Summary of potential suppliers' presence. The applicant must 
provide a summary table with the following information for each 
potential supplier for each destination market: potential supplier 
name; the supplier's total amount of economic capacity (not subject to 
transmission constraints); and the supplier's amount of economic 
capacity from which energy can be delivered to the destination market 
(after adjusting for transmission availability). A similar table must 
be provided for available economic capacity, and for any other 
generating capacity measure used by the applicant.
    (10) Historical trade data. The applicant must provide data 
identifying all of the merging entities' wholesale sales and purchases 
of electric energy for the most recent two years. For each transaction, 
the applicant must include the following information: type of 
transaction (such as non-firm, short-term firm, long-term firm, peak, 
off-peak, etc.); name of purchaser; name of seller; date; duration and 
time period of the transaction; quantity of energy purchased or sold; 
energy charge per unit; megawatthours purchased or sold; price; and the 
delivery points used to effect the sale or purchase.
    (11) Historical transmission data. The applicant must provide 
information concerning any transmission service denials, interruptions 
and curtailments on the merging entities' systems, for the most recent 
two years, to the extent the information is available from OASIS data, 
including the following information: name of the customer denied, 
interrupted or curtailed; type, quantity and duration of service at 
issue; the date and period of time involved; reason given for the 
denial, interruption or curtailment; the transmission path; and the 
reservations or other use anticipated on the affected transmission path 
at the time of the service denial, curtailment or interruption.
    (e) Any remedies proposed by the applicant (including, for example, 
divestiture or participation in an independent system operator) which 
are intended to mitigate the adverse effect of the proposed transaction 
must, to the extent possible, be factored into the horizontal 
Competitive Screen Analysis as an additional post-transaction analysis. 
Any mitigation commitments that involve facilities (e.g., in connection 
with divestiture of generation) must specify which facilities are 
affected by the commitment.
    (f) Additional factors. If the applicant does not propose 
mitigation measures and does not otherwise demonstrate that the 
proposed transaction will not adversely affect competition, the 
applicant must address: the potential for entry in the market and the 
role that entry could play in mitigating adverse competitive effects of 
the transaction; the efficiency gains that reasonably could not be 
achieved by other means; and whether, but for the transaction, one or 
more of the merging entities would be likely to fail, causing its 
assets to exit the market.


Sec. 33.4  Additional information requirements for applications 
resulting in a single corporate entity obtaining ownership or control 
over businesses that provide inputs to electric generation and electric 
generation products that were previously unaffiliated.

    (a) If, as a result of the proposed transaction, a single corporate 
entity obtains ownership or control over a party to the transaction or 
its parent companies, subsidiaries, affiliates and associate companies 
that provides inputs to electric generation and another party to the 
transaction or its parent companies, subsidiaries, affiliates and 
associate companies that currently is unaffiliated with the party that 
provides inputs to electric generations and that provides electric 
generation products, the applicant must file the vertical Competitive 
Screen Analysis described in paragraphs (b), (c), (d) and (e) of this 
section, unless the applicant affirmatively demonstrates that the 
parties do not provide inputs to the generation of electric energy and 
electric generating capacity products in the same geographic markets or 
the extent of the inputs to the generation of electric energy (i.e., 
upstream relevant products) provided by the party to potential 
suppliers of electric generating capacity products (i.e., the 
downstream relevant products) to the relevant destination markets, as 
defined in paragraph (c)(2) of Sec. 33.3, is de minimis.
    (b) All data, assumptions, techniques and conclusions in the 
vertical Competitive Screen Analysis must be accompanied by appropriate 
documentation and support.
    (c) The vertical Competitive Screen Analysis must be completed 
using the following steps:
    (1) Define relevant products.
    (i) Downstream relevant products. Consistent with paragraph (c)(1) 
of Sec. 33.3, the applicant must identify and define all relevant 
products sold by a party to the transaction or its parent companies, 
subsidiaries, affiliates, and associate companies in relevant 
downstream geographic markets.
    (ii) Upstream relevant products. The applicant must identify and 
define all relevant inputs to the generation of electricity provided by 
an upstream business of any of the parties to the transaction or its 
parent companies, subsidiaries, affiliates and associate companies in 
the most recent two years.
    (2) Define geographic markets.
    (i) Downstream geographic markets. Consistent with paragraphs 
(c)(2) and (c)(3) of Sec. 33.3, the applicant must identify all 
geographic markets in which it or its parent companies, subsidiaries, 
affiliates and associate companies sells the downstream relevant 
products identified in paragraph (c)(1)(i) of this section.
    (ii) Upstream geographic markets. The applicant must identify all 
geographic markets in which it or its parent companies, subsidiaries, 
affiliates and associate companies provides the upstream relevant 
products identified in paragraph (c)(1)(ii) of this section.
    (3) Analyze competitive conditions.
    (i) Downstream geographic market. The applicant must compute market 
share for each supplier in each relevant downstream geographic market 
and the HHI statistic for the downstream market. The applicant must 
provide a summary table with the following information for each 
relevant downstream geographic market: the economic capacity of each 
downstream supplier (specify the amount of such capacity served by each 
upstream supplier); the total amount of economic capacity in the 
downstream market served by each upstream supplier; the market share of 
economic capacity served by each upstream supplier; and the HHI 
statistic for the downstream market. A similar table must be provided 
for available economic capacity and for any other measure used by the 
applicant.
    (ii) Upstream geographic market. The applicant must provide a 
summary table with the following information for each upstream relevant 
product in each relevant upstream geographic market: the amount of 
relevant product provided by each upstream supplier; the total amount 
of relevant product in the market; the market share of each

[[Page 20359]]

upstream supplier; and the HHI statistic for the upstream market.
    (d) Any remedies proposed by the applicant (including, for example, 
divestiture or participation in an independent system operator) which 
are intended to mitigate the adverse effect of the proposed transaction 
must, to the extent possible, be factored into the vertical Competitive 
Screen Analysis as an additional post-transaction analysis. Any 
mitigation commitments that involve facilities must specify which 
facilities are affected by the commitment.
    (e) Additional factors. If the applicant does not propose 
mitigation measures and does not otherwise demonstrate that the 
proposed transaction will not adversely affect competition, the 
applicant must address: the potential for entry in the market and the 
role that entry could play in mitigating adverse competitive effects of 
the transaction; the efficiency gains that reasonably could not be 
achieved by other means; and whether, but for the transaction, one or 
more of the parties to the transaction would be likely to fail, causing 
its assets to exit the market. The applicant must address each of the 
additional factors in the context of whether the proposed transaction 
is likely to present concerns about raising rivals' costs or 
anticompetitive coordination.


Sec. 33.5  Proposed accounting entries.

    If the applicant is required to maintain its books of account in 
accordance with the Commission's Uniform System of Accounts (part 101 
of this chapter), the applicant must present proposed accounting 
entries showing the effect of the transaction with sufficient detail to 
indicate the effects on all account balances (including amounts 
transferred on an interim basis), the effect on the income statement, 
and the effects on other relevant financial statements. The applicant 
must also explain how the amount of each entry was determined.


Sec. 33.6  Form of notice.

    The applicant must file a form of notice of the application 
suitable for issuance in the Federal Register, as well as a copy of the 
same notice in electronic format in WordPerfect 6.1 (or other 
electronic format the Commission may designate) on a 3\1/2\'' diskette 
marked with the name of the applicant and the words ``Notice of 
Application.'' The Commission may require the applicant to give such 
local notice by publication as the Commission in its discretion may 
deem proper.


Sec. 33.7  Verification.

    The original application shall be signed by a person or persons 
having authority with respect thereto and having knowledge of the 
matters therein set forth, and shall be verified under oath.


Sec. 33.8  Number of copies.

    An original and five copies of application under this part shall be 
submitted. If the applicant must submit information specified in 
paragraphs (b), (c), (d), (e) and (f) of Sec. 33.3 or paragraphs (b), 
(c), (d) and (e) of Sec. 33.4, the applicant must submit all such 
information in electronic format along with a printed description and 
summary. The electronic version of all text documents shall be 
submitted in WordPerfect Version 6.1, and the electronic version of all 
spreadsheet documents shall be submitted in either Lotus, QuattroPro 
Version 6.0 or Microsoft Excel Version 4.0 (or other electronic format 
the Commission may designate). The printed portion of the applicant's 
submission must include documentation for the electronic submission, 
including all file names and a summary of the data contained in each 
file. Each column (or data item) in each separate data table or chart 
must be clearly labeled in accordance with the requirements of 
Sec. 33.3 and Sec. 33.4. Any units of measurement associated with 
numeric entries must also be included.


Sec. 33.9  Protective order.

    If the applicant seeks to protect any portion of the application, 
or any attachment thereto, from public disclosure pursuant to 
Sec. 388.112 of this chapter of the Commission's regulations, the 
applicant must include with its request for privileged treatment a 
proposed protective order under which the parties to the proceeding 
will be able to review any of the data, information, analysis or other 
documentation relied upon by the applicant for which privileged 
treatment is sought.


Sec. 33.10  Additional information requests by the Commission.

    The Director of the Office of Electric Power Regulation, or his 
designee, may, by letter, require the applicant to submit additional 
information as is needed for Commission analysis of an application 
filed under this part.

[FR Doc. 98-10686 Filed 4-23-98; 8:45 am]
BILLING CODE 6717-01-P