Policy Statement Establishing Factors the Commission Will Consider in Evaluating Whether A Proposed Merger is Consistent With the Public Interest
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77 FERC
61,263
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
18 CFR PART 2
(Docket No. RM96-6-000)
Inquiry Concerning the Commission's Merger Policy
Under the Federal Power Act:
Policy Statement
ORDER NO. 592
POLICY STATEMENT
(Issued December 18, 1996)
AGENCY : Federal Energy Regulatory Commission.
ACTION : Policy Statement.
SUMMARY : The Federal Energy Regulatory Commission
(Commission) is amending its regulations to update and clarify
the Commission's procedures, criteria and policies concerning
public utility mergers in light of dramatic and continuing
changes in the electric power industry and the regulation of
that industry. The purpose of this Policy Statement is to
ensure that mergers are consistent with the public interest
and to provide greater certainty and expedition in the
Commission's analysis of merger applications.
EFFECTIVE DATE: This Policy Statement is effective
immediately.
Docket No. RM96-6-000 - 2 -
FOR FURTHER INFORMATION CONTACT:
Jan Macpherson (Legal Matters)
Kimberly D. Bose (Legal Matters)
Office of the General Counsel
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D. C. 20426
Telephone: (202) 208-0921
(202) 208-2284
Wilbur C. Earley (Technical Matters)
Office of Economic Policy
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D. C. 20426
Telephone: (202) 208-0023
Michael A. Coleman (Technical Matters)
Office of Electric Power Regulation
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D. C
Telephone: (202) 208-0921
(202) 208-2284
Wilbur C. Earley (Technical Matters)
Office of Economic Policy
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D. C. 20426
Telephone: (202) 208-0023
Michael A. Coleman (Technical Matters)
Office of Electric Power Regulation
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D. C. 20426
Telephone: (202) 208-1236
SUPPLEMENTARY INFORMATION: In addition to publishing the full
text of this document in the Federal Register, the Commission
also provides all interested persons an opportunity to inspect
or copy the contents of this document during normal business
hours in the Commission's Public Reference Room, Room 2A, 888
First Street, N.E., Washington, D. C. 20426.
The Commission Issuance Posting System (CIPS), an
electronic bulletin board service, provides access to the
texts of formal documents issued by the Commission. CIPS is
available at no charge to the user and may be accessed using a
personal computer with a modem by dialing (202) 208-1397 if
dialing locally or 1-800-856-3920 if dialing long distance.
CIPS is also available through the Fed World System (by Modem
Docket No. RM96-6-000 - 3 -
or Internet). To access CIPS, set your communications
software to 19200, 14400, 12000, 9600, 7200, 4800, 2400 or
1200bps full duplex, no parity, 8 data bits, and 1 stop bit.
The full text of this final rule will be available on CIPS in
ASCII indefinitely and WordPerfect 5.1 format for one year.
The complete text on diskette in
Wordperfect format may also be purchased from the Commission's
copy contractor, LaDorn Systems Corporation, also located in
Room 2A, 888 First Street, N.E., Washington, D. C. 20426.
The Commission's bulletin board system also can be
accessed through the FedWorld system directly by modem or
through the Internet
ly and WordPerfect 5.1 format for one year.
The complete text on diskette in
Wordperfect format may also be purchased from the Commission's
copy contractor, LaDorn Systems Corporation, also located in
Room 2A, 888 First Street, N.E., Washington, D. C. 20426.
The Commission's bulletin board system also can be
accessed through the FedWorld system directly by modem or
through the Internet. To access the FedWorld system by modem:
Dial (703) 321-3339 and logon to the FedWorld system
After logging on, type: /go FERC
To access the FedWorld system through the Internet, a
telnet application must be used either as a stand-alone or
linked to a Web browser:
Telnet to: fedworld.gov
Select the option: [1] FedWorld
Logon to the FedWorld system
Type: /go FERC
or
Point your Web Browser to: http://www.fedworld.gov
Scroll down the page to select FedWorld Telnet Site
Select the option: [1] FedWorld
Logon to the FedWorld system
Docket No. RM96-6-000 - 4 -
Type: /go FERC
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Elizabeth Anne Moler, Chair;
Vicky A. Bailey, James J. Hoecker,
William L. Massey, and Donald F. Santa,
Jr.
Inquiry Concerning the )
Commission's Merger Policy )
Under the Federal Power Act; ) Docket No. RM96-6-000
Policy Statement )
ORDER NO. 592
POLICY STATEMENT ESTABLISHING FACTORS THE COMMISSION
WILL CONSIDER IN EVALUATING WHETHER A PROPOSED MERGER
IS CONSISTENT WITH THE PUBLIC INTEREST
(Issued December 18, 1996)
I. INTRODUCTION
This Policy Statement updates and clarifies the Federal
Energy Regulatory Commission's (Commission) procedures,
criteria and policies concerning public utility mergers in
light of dramatic and continuing changes in the electric power
industry and corresponding changes in the regulation of that
industry
CONSISTENT WITH THE PUBLIC INTEREST
(Issued December 18, 1996)
I. INTRODUCTION
This Policy Statement updates and clarifies the Federal
Energy Regulatory Commission's (Commission) procedures,
criteria and policies concerning public utility mergers in
light of dramatic and continuing changes in the electric power
industry and corresponding changes in the regulation of that
industry. The Commission believes it is particularly
important to refine and modify its merger policy at this
critical juncture for the electric industry. The Commission
recognizes that the electric industry now is in the midst of
enormous technological, regulatory and economic changes. At
the heart of these changes is the transition to competitive
power supply markets, prompted in part by this Commission's
open access transmission policies. These changes are
fundamental, and mergers and consolidations are among the
strategic options available for companies seeking to
Docket No. RM96-6-000 - 2 -
reposition themselves in response to the emerging competitive
business landscape.
In this Policy Statement, the Commission has two broad
goals. First, we intend to ensure that future mergers are
consistent with the competitive goals of the Energy Policy Act
of 1992 (EPAct) 1/ and the Commission's recent Open Access
Rule. 2/ This means that the Commission, in applying the
Federal Power Act standard that mergers must be consistent
with the public interest, must account for changing market
structures and pay close attention to the possible effect of a
merger on competitive bulk power markets and the consequent
effects on ratepayers. Second, the Commission believes that
as the pace of industry change increases, market participants
require greater regulatory certainty and expedition of
regulatory action in order to respond quickly to rapidly
changing market conditions
g market
structures and pay close attention to the possible effect of a
merger on competitive bulk power markets and the consequent
effects on ratepayers. Second, the Commission believes that
as the pace of industry change increases, market participants
require greater regulatory certainty and expedition of
regulatory action in order to respond quickly to rapidly
changing market conditions. Accordingly, this Policy
Statement offers procedural innovations and more specific
information that we would expect applicants to file to
facilitate the Commission acting more quickly on merger
1/
Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat.
2776, 2905 (1992).
2/
See Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public
Utilities and Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities, Order No. 888,
(Open Access Rule) 61 FR 21,540 (May 10, 1996), III FERC
Stats. & Regs. 31,036 (1996), reh'g pending.
Docket No. RM96-6-000 - 3 -
requests. 3/
We will generally take into account three factors in
analyzing proposed mergers: the effect on competition, the
effect on rates, and the effect on regulation. First, our
analysis of the effect on competition will more precisely
identify geographic and product markets and will adopt the
Department of Justice/Federal Trade Commission Merger
Guidelines (Guidelines) as the analytical framework for
analyzing the effect on competition. The Guidelines adopt a
five-step procedure for analyzing mergers:
First, the Agency assesses whether the
merger would significantly increase
concentration and result in a concentrated
market, properly defined and measured.
Second, the Agency assesses whether the
merger, in light of market concentration
and other factors that characterize the
market, raises concern about potential
adverse competitive effects
ive-step procedure for analyzing mergers:
First, the Agency assesses whether the
merger would significantly increase
concentration and result in a concentrated
market, properly defined and measured.
Second, the Agency assesses whether the
merger, in light of market concentration
and other factors that characterize the
market, raises concern about potential
adverse competitive effects. Third, the
Agency assesses whether entry would be
timely, likely and sufficient either to
deter or to counteract the competitive
3/
In the near future, the Commission will also issue a
notice of proposed rulemaking to set forth more specific
filing requirements consistent with this Policy Statement
and additional procedures for improving the merger
hearing process.
Docket No. RM96-6-000 - 4 -
effects of concern. Fourth, the Agency
assesses any efficiency gains that
reasonably cannot be achieved by the
parties through other means. Finally, the
Agency assesses whether, but for the
merger, either party to the transaction
would be likely to fail, causing its assets
to exit the market. [4/]
By applying an analytic "screen" based on the Guidelines early
in the merger review process, the Commission will be able to
identify proposed mergers that clearly will not harm
competition.
Second, in assessing the effect of a proposed merger on
rates, we will no longer require applicants and intervenors to
estimate the future costs and benefits of a merger and then
litigate the validity of those estimates. Instead, we will
require applicants to propose appropriate rate protection for
customers. The most promising and expeditious means of
addressing this issue is for parties to engage in a pre-filing
consensus-building effort that will result in a filing that
includes appropriate rate protection
imate the future costs and benefits of a merger and then
litigate the validity of those estimates. Instead, we will
require applicants to propose appropriate rate protection for
customers. The most promising and expeditious means of
addressing this issue is for parties to engage in a pre-filing
consensus-building effort that will result in a filing that
includes appropriate rate protection. If merger applicants
and their affected wholesale customers are able to agree on
appropriate ratepayer safeguards, it should not be necessary
4/
U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, issued April 2, 1992, 57 FR
41,552 (1992).
Docket No. RM96-6-000 - 5 -
to set this aspect of the merger for hearing. 5/ Even where
the parties have been unable to come to an agreement before
the merger is filed, they should continue to attempt to
negotiate a settlement. While there are several potential
mechanisms available, which we discuss herein, adequate
ratepayer protection will necessarily depend on the particular
circumstances of the merging utilities and their ratepayers.
There is no one-size-fits-all approach, and the Commission
strongly encourages parties to resolve this issue without a
formal hearing. However, we also recognize the possibility
that parties may not be able to reach an agreement on
appropriate ratepayer protection and that there may be
situations in which the Commission nevertheless would be able
to approve a merger. This could occur either after a hearing
or on the basis of parties' filings if we determine that the
applicants' proposal sufficiently insulates the ratepayers
from harm.
Finally, with regard to the effect of the merger on
regulation, we will adopt the approach we have used in recent
cases
at there may be
situations in which the Commission nevertheless would be able
to approve a merger. This could occur either after a hearing
or on the basis of parties' filings if we determine that the
applicants' proposal sufficiently insulates the ratepayers
from harm.
Finally, with regard to the effect of the merger on
regulation, we will adopt the approach we have used in recent
cases. With respect to shifts of regulatory authority to the
Securities and Exchange Commission (SEC) where the applicants
will be part of a registered public utility holding company,
they may either commit themselves to abide by this
5/
Parties may choose to use alternative dispute resolution
or other settlement processes to reach mutually agreeable
ratepayer protection resolutions.
Docket No. RM96-6-000 - 6 -
Commission's policies with regard to affiliate transactions,
or we will set the issue for hearing. With respect to the
merger's effect on state regulation, where the state
commissions have authority to act on the merger, we intend to
rely on the state commissions to exercise their authority to
protect state interests.
In order to provide more certainty and expedition in our
handling of merger applications, this Policy Statement
explains how merger applicants should address each of the
three factors as part of their case-in-chief in support of
their application. For the effect on competition factor,
applicants who demonstrate that their merger passes the market
power screen established in this Policy Statement will
establish a presumption that the merger raises no market power
concerns. In that event, a trial-type hearing on this factor
should not be necessary. We are also setting forth guidance
on the other two factors and ways to resolve any concerns
about these factors without a trial-type hearing.
For mergers that do not pass the market power screen, we
will engage in a more detailed analysis, which may include a
trial-type hearing
raises no market power
concerns. In that event, a trial-type hearing on this factor
should not be necessary. We are also setting forth guidance
on the other two factors and ways to resolve any concerns
about these factors without a trial-type hearing.
For mergers that do not pass the market power screen, we
will engage in a more detailed analysis, which may include a
trial-type hearing. As discussed below, if we find that a
merger will have an adverse effect on competition, and if the
additional factors examined do not mitigate or counterbalance
the adverse competitive effects of the merger, we may impose
various remedies where necessary to make a merger consistent
with the public interest.
Docket No. RM96-6-000 - 7 -
In this Policy Statement, we also provide guidance on
what kind of evidence is needed for each factor. Thus,
applicants will be able to provide the necessary information
at the outset. This should provide more certainty and help
focus our review on specific issues that require more
scrutiny. We believe that the additional information that we
would expect parties to file will expedite the merger review
process and enable the Commission to act on section 203
applications more quickly. We intend to process most merger
applications within 12-15 months after the applications are
completed, as discussed below under "Procedures."
In general, we expect that a merger approved by the
Commission will satisfy each of the three factors that form
the basis of our merger review, i.e., post-merger market power
must be within acceptable thresholds or be satisfactorily
mitigated, acceptable customer protections must be in place,
and any adverse effect on regulation must be addressed
ted, as discussed below under "Procedures."
In general, we expect that a merger approved by the
Commission will satisfy each of the three factors that form
the basis of our merger review, i.e., post-merger market power
must be within acceptable thresholds or be satisfactorily
mitigated, acceptable customer protections must be in place,
and any adverse effect on regulation must be addressed.
However, we recognize that there may be unusual circumstances
in which, for example, a merger that raises competitive
concerns may nevertheless be in the public interest because
customer benefits (such as the need to ensure reliable
electricity service from a utility in severe financial
distress) may clearly compel approval. Consistent with the
Guidelines, the Commission would continue to account for such
circumstances and could, in a particular case, conclude that
on balance the merger is consistent with the public interest.
Docket No. RM96-6-000 - 8 -
Finally, the Commission recognizes that, as the industry
evolves to meet the challenges of a more competitive
marketplace, new types of mergers and consolidations will be
proposed. For example, in addition to mergers between public
utilities, market participants already are considering
restructuring options that include mergers between public
utilities and natural gas distributors and pipelines,
consolidations of electric power marketer businesses with
other electric or gas marketer businesses, and combinations of
jurisdictional electric operations with other energy services.
6/ As a consequence, our merger policy must be sufficiently
flexible to accommodate the review of these new and innovative
business combinations that are subject to our jurisdiction
under section 203 and to determine their implications on
competitive markets
es with
other electric or gas marketer businesses, and combinations of
jurisdictional electric operations with other energy services.
6/ As a consequence, our merger policy must be sufficiently
flexible to accommodate the review of these new and innovative
business combinations that are subject to our jurisdiction
under section 203 and to determine their implications on
competitive markets. We believe that the analytical framework
articulated in this Policy Statement provides a suitable
methodology for determining whether such mergers will be
consistent with the public interest. 7/ However, it will not
6/
See, for example, among others, the proposed merger of
Enron Corporation with Portland General Corporation
(Docket No. ER96-36-000) and the proposed acquisition of
PanEnergy Corporation by Duke Power Company, announced
November 25, 1996.
7/
We recognize that, as some energy products possibly
become more suitable alternatives to others, or as the
combination of complementary energy services possibly
affects barriers to entry, the focus of our analysis may
have to be adjusted to encompass those products, markets,
and factors that are relevant to analyzing the exercise
of market power in the future business environment.
Docket No. RM96-6-000 - 9 -
be necessary for the merger applicants to perform the screen
analysis or file the data needed for the screen analysis in
cases where the merging firms do not have facilities or sell
relevant products in common geographic markets. In these
cases, the proposed merger will not have an adverse
competitive impact (i.e., there can be no increase in the
applicants' market power unless they are selling relevant
products in the same geographic markets) so there is no need
for a detailed data analysis. If the Commission is unable to
conclude that the applicants meet this standard, the
Commission will require the applicants to supply the
competitive analysis screen data described in Appendix A
tive impact (i.e., there can be no increase in the
applicants' market power unless they are selling relevant
products in the same geographic markets) so there is no need
for a detailed data analysis. If the Commission is unable to
conclude that the applicants meet this standard, the
Commission will require the applicants to supply the
competitive analysis screen data described in Appendix A.
II. BACKGROUND
Section 203(a) of the Federal Power Act (FPA) provides
that no public utility shall sell, lease, or otherwise dispose
of the whole of its facilities that are subject to the
Commission's jurisdiction, or any part thereof with a value in
excess of $50,000, or by any means whatsoever, directly or
indirectly, merge or consolidate such facilities with those of
any other person, or purchase, acquire, or take any security
of another public utility without first securing the
Commission's approval. 8/ Section 203(a) also says that "if
the Commission finds that the proposed . . . [merger] will be
8/
While many types of transactions, including relatively
minor ones, may require section 203 authorization, this
Policy Statement focuses on mergers.
Docket No. RM96-6-000 - 10 -
consistent with the public interest, it shall approve the
same." 9/ Under section 203(b), the Commission may approve a
proposed merger "in whole or in part and upon such terms and
conditions as it finds necessary or appropriate. . . ." This
power is to be exercised "to secure the maintenance of
adequate service and the coordination in the public interest
of facilities subject to the jurisdiction of the Commission."
10/
Thirty years ago, in the Commonwealth case, 11/ the
Commission set forth six non-exclusive factors for evaluating
mergers:
(1) the effect of the proposed merger on
competition;
(2) the effect of the proposed merger on the
applicants' operating costs and rate
levels;
(3) the reasonableness of the purchase price;
subject to the jurisdiction of the Commission."
10/
Thirty years ago, in the Commonwealth case, 11/ the
Commission set forth six non-exclusive factors for evaluating
mergers:
(1) the effect of the proposed merger on
competition;
(2) the effect of the proposed merger on the
applicants' operating costs and rate
levels;
(3) the reasonableness of the purchase price;
(4) whether the acquiring utility has coerced the
to- be-acquired utility into acceptance of
the merger;
9/
16 U.S.C. 824b(a) (1994).
10/ 16 U.S.C. 824b(b) (1994).
11/ See Commonwealth Edison Company (Commonwealth), Opinion
No. 507, 36 F.P.C. 927, 936-42 (1966), aff'd sub nom.
Utility Users League v. FPC, 394 F.2d 16 (7th Cir. 1968),
cert. denied, 393 U.S. 953 (1969).
Docket No. RM96-6-000 - 11 -
(5) the impact of the merger on the effectiveness of
state and federal regulation; and
(6) the contemplated accounting treatment.
Of these factors, the first two -- the effect on competition
and the effect on costs and rates -- have presented the most
significant issues in recent merger cases.
Since Commonwealth, however, both the electric utility
industry and utility regulation have changed dramatically.
The Commission's Open Access Rule 12/ describes these changes
at length. Advances in technology now allow scale economies
to be exploited by smaller-size units, thereby allowing
smaller new plants to be brought on line at costs below those
of the large plants of the 1970s and earlier. 13/
Technological advances in transmission have made possible the
economic transmission of electric power over long distances at
higher voltages. 14/ State public utility commissions have
been relying more on competitive contracting as the primary
vehicle for adding new generating capacity
r new plants to be brought on line at costs below those
of the large plants of the 1970s and earlier. 13/
Technological advances in transmission have made possible the
economic transmission of electric power over long distances at
higher voltages. 14/ State public utility commissions have
been relying more on competitive contracting as the primary
vehicle for adding new generating capacity. 15/ This
Commission has authorized market-based rates for wholesale
electricity sales when it has found that the public utilities
12/ See Open Access Rule, 61 FR at 21,540.
13/ See Id. at 21,544.
14/ See Id. at 21,544-45.
15/ See Paul L. Joskow, Regulatory Failure, Regulatory
Reform, and Structural Change in the Electrical Power
Industry, in Brookings Papers on Econ. Activity,
Microeconomics 125 (1989).
Docket No. RM96-6-000 - 12 -
lack market power.
In 1992, a landmark change occurred when Congress enacted
the EPAct. That statute permitted new power suppliers, called
exempt wholesale generators, to enter wholesale power markets,
and expanded the Commission's authority to require
transmitting utilities to provide eligible third parties with
transmission access. In 1996, consistent with the competitive
goals of EPAct, the Commission adopted a sweeping regulatory
policy change with the promulgation of the Open Access Rule.
That rule requires each public utility that owns, operates or
controls interstate transmission facilities to file an open
access transmission tariff that offers both network and point-
to-point service. The rule is designed to remedy the undue
discrimination that is inherent when a utility does not offer
truly comparable transmission service to others, and to
promote competitive bulk power markets. Thus, EPAct and the
Commission's Open Access Rule have fundamentally changed
federal regulation of the electric utility industry
sion tariff that offers both network and point-
to-point service. The rule is designed to remedy the undue
discrimination that is inherent when a utility does not offer
truly comparable transmission service to others, and to
promote competitive bulk power markets. Thus, EPAct and the
Commission's Open Access Rule have fundamentally changed
federal regulation of the electric utility industry. In
addition, many states are contemplating retail access, which
may prompt even more significant changes in the industry.
Because these changes have implications for the
Commission's regulation of mergers, 16/ we issued a Notice of
16/ Many of the commenters in the Open Access Rule proceeding
suggested that the Commission reevaluate its merger
policy in concert with the open access rulemaking. See
Open Access Rule at 61 FR 21,555.
Docket No. RM96-6-000 - 13 -
Inquiry (NOI) 17/ soliciting comments on whether our thirty-
year-old criteria for evaluating mergers should be revised.
While most commenters agree that we should revise our merger
policies, there are differences of opinions on the general
direction of the change needed. The comments are summarized
in Appendix D. 18/
III. DISCUSSION
A. General Comments on Revising Merger Policy
1. Direction of Change
As noted above, under section 203, the Commission
evaluates mergers to determine whether they are "consistent
with the public interest." Congress did not intend the
Commission to be hostile to mergers. 19/ We have found that
the transaction taken as a whole must be consistent with the
public interest. 20/ Thus, even if certain aspects of a
proposed merger are detrimental, the merger can still be
consistent with the public interest if there are
17/ See Inquiry Concerning the Commission's Merger Policy
Under the Federal Power Act, Docket No. RM96-6-000, 61 FR
4,596 (February 7, 1996), FERC Stats. & Regs. 35,531
as a whole must be consistent with the
public interest. 20/ Thus, even if certain aspects of a
proposed merger are detrimental, the merger can still be
consistent with the public interest if there are
17/ See Inquiry Concerning the Commission's Merger Policy
Under the Federal Power Act, Docket No. RM96-6-000, 61 FR
4,596 (February 7, 1996), FERC Stats. & Regs. 35,531.
18/ Appendix C sets forth the full names and acronyms of the
commenters.
19/ Pacific Power & Light Co. v. FPC, 111 F.2d 1014, 1016
(9th Cir. 1940) (PP&L); also see Northeast Utilities
Service Co. v. FERC (NU), 993 F.2d 937 (1st Cir. 1993).
20/ Entergy Services Inc. and Gulf States Utilities
Company (Entergy), Opinion No. 385, 65 FERC 61,332
at 62,473 (1993), order on reh'g, Opinion No. 385-A,
67 FERC 61,192 (1994), appeal pending.
Docket No. RM96-6-000 - 14 -
countervailing benefits that derive from the merger. 21/
Almost all commenters argue that we need to revise our
merger policies and standards in light of the changes in the
industry. 22/ On one side, many commenters argue that mergers
may prevent markets from becoming truly competitive. 23/ On
the other side, some commenters suggest that the Commission
should approve a merger unless harm to the public interest is
demonstrated. 24/ These commenters claim that most mergers
are procompetitive and should be approved unless a problem is
identified.
We do not agree either with commenters who argue that we
should actively encourage mergers or those who argue that we
should discourage them. The statutory standard is that a
merger must be "consistent with" the public interest. While
we believe that the Commission has broad flexibility in
determining what is in the public interest, particularly in
light of changing conditions in the industry, we do not read
the statutory language as creating a presumption against
mergers
rgers or those who argue that we
should discourage them. The statutory standard is that a
merger must be "consistent with" the public interest. While
we believe that the Commission has broad flexibility in
determining what is in the public interest, particularly in
light of changing conditions in the industry, we do not read
the statutory language as creating a presumption against
mergers. 25/ Nor are we prepared to presume that all mergers
21/ See NU, 993 F.2d at 945.
22/ See Appendix D, Section IA.
23/ For example, APPA, NRECA at 7-8; ELCON at 12-13.
24/ For example, Utilicorp United at 2, 7, 10.
25/ In NU, 993 F.2d at 947, the court pointed out that the
FPA differs from the Bank Merger Act in that the latter
contains an "implicit presumption that mergers are to be
disapproved."
Docket No. RM96-6-000 - 15 -
are beneficial. It is the applicants' responsibility to
demonstrate that the merger is consistent with the public
interest.
We believe that if the Commission is to fulfill its
statutory responsibilities, it must determine what is
consistent with the public interest in light of conditions in
the electric industry in general as well as the specific
circumstances presented by a proposed merger. In an era of
traditional, cost-of-service based regulation, the Commission
defined its public interest responsibilities consistent with
that structure. Today, we believe that the public interest
requires policies that do not impede the development of
vibrant, fully competitive generation markets. We are
refining our analysis of the effects of proposed mergers on
competition in order to protect the public interest in the
development of such highly competitive markets, as discussed
below.
The Commission's interpretation of the public interest
standard has never been static
terest
requires policies that do not impede the development of
vibrant, fully competitive generation markets. We are
refining our analysis of the effects of proposed mergers on
competition in order to protect the public interest in the
development of such highly competitive markets, as discussed
below.
The Commission's interpretation of the public interest
standard has never been static. In the El Paso case, 26/ we
explained that our view of what it takes to mitigate market
power sufficiently to allow approval of a merger had evolved
over time. We pointed out that as the industry had become
more competitive, we began examining market power in
26/ El Paso Electric Company and Central and Southwest
Services Inc., 68 FERC 61,181 61,914-15 (1994),
dismissed, 72 FERC 61,292 (1995).
Docket No. RM96-6-000 - 16 -
transmission more closely, and that comparable access was now
required. Moreover, we explained in El Paso that while in the
past we had focused only on increases in market power, we no
longer believed that we could find any merger to be consistent
with the public interest, whether or not the merger created
increased market power, unless the merging utilities provided
open access. We adopted this revised view of the public
interest in light of EPAct's goal of encouraging greater
wholesale competition and the significant increase in actual
competition.
2. How to Implement New Policies
We are adopting our new policies through this Policy
Statement rather than through other means, such as acting on a
case-by-case basis or through a rulemaking. While some
commenters suggested other means, 27/ we believe that a Policy
Statement is needed. Proceeding on a case-by-case basis would
not give applicants and intervenors the guidance needed to
facilitate the presentation of the kinds of well-focused
evidence and arguments that will improve and expedite the
merger review process
as acting on a
case-by-case basis or through a rulemaking. While some
commenters suggested other means, 27/ we believe that a Policy
Statement is needed. Proceeding on a case-by-case basis would
not give applicants and intervenors the guidance needed to
facilitate the presentation of the kinds of well-focused
evidence and arguments that will improve and expedite the
merger review process. On the other hand, a binding rule
would be too rigid at this time. Because the industry
continues to change rapidly, we must maintain flexibility in
fulfilling our statutory responsibilities.
Commenters disagree on whether we should apply the new
27/ See Appendix D at Section IB.
Docket No. RM96-6-000 - 17 -
policy to pending merger proposals. 28/ Those proposing
mergers have been on notice since we issued the NOI that the
Commission is considering revising its criteria for evaluating
proposed mergers. In several recent merger hearing orders, we
have discussed the NOI and have indicated that we intend to
evaluate pending proposals in light of any new criteria we
might adopt. 29/ We do not believe that any applicants will
be seriously disadvantaged by application of this policy to
pending cases. Our analysis of the effect of a proposed
merger on competition has been evolving for some time,
particularly since the enactment of EPAct and the issuance of
the Open Access Rule. Thus, we are not applying radically new
analyses or standards. The same is true of the other two
remaining factors, the effects on regulation and on rates. We
will address the specific application of the policy to pending
cases on a case-by-case basis. If necessary, we will require
the parties to supplement the record in any pending case, and
we do not expect that this will cause any substantial delay.
In fact, if anything, we expect this Policy Statement will
make it easier to resolve any remaining issues, because of our
28/ Id
address the specific application of the policy to pending
cases on a case-by-case basis. If necessary, we will require
the parties to supplement the record in any pending case, and
we do not expect that this will cause any substantial delay.
In fact, if anything, we expect this Policy Statement will
make it easier to resolve any remaining issues, because of our
28/ Id.
29/ Union Electric Company and Central Illinois Public
Service Company (Union Electric), 77 FERC 61,026
(1996), reh'g pending; Public Service Company of Colorado
and Southwestern Public Service Company (PS Colorado), 75
FERC 61,325 (1996), reh'g pending; Baltimore Gas &
Electric and Potomac Electric Power Company, 76 FERC
61,111 (1996).
Docket No. RM96-6-000 - 18 -
clarification of our policies.
B. Effect on Competition and Remedies
1. Background
In response to the NOI, we received many comments on our
market power analysis. Commenters generally divide into two
groups, one recommending stricter scrutiny of the effect of
mergers on competition, while the other argues that less
concern is warranted in today's more competitive environment.
Those in the first group support more stringent scrutiny
because they believe that mergers can cause competitive harm,
particularly in a transitional era. Many commenters 30/ argue
that mergers increase generation market power, increase
monopsony buying power, encourage self-dealing, discourage
alternative suppliers under retail access, and tend to
preserve certain competitive advantages associated with
vertical integration. These commenters criticize the analysis
the Commission has been using to evaluate mergers
larly in a transitional era. Many commenters 30/ argue
that mergers increase generation market power, increase
monopsony buying power, encourage self-dealing, discourage
alternative suppliers under retail access, and tend to
preserve certain competitive advantages associated with
vertical integration. These commenters criticize the analysis
the Commission has been using to evaluate mergers. They argue
that the Commission has not given enough consideration to
important factors, including generation dominance, the effect
of transmission constraints on competition, the merged
company's ability to exercise market power in localized areas
and in short-term energy sales, the effects on markets in
which little or no effective competition exists, and the
30/ These include, for example, CA Com, Joint Consumer
Advoc., APPA, NRECA, Environmental Action et al.,
RUS, Salt River, Lubbock, Wisconsin Customers, and
TAPS.
Docket No. RM96-6-000 - 19 -
significant anticompetitive advantages that vertically
integrated utilities possess as a result of the long-existing
statutory and regulatory system.
The second broad group of commenters 31/ argues that
mergers are procompetitive. These commenters maintain that
mergers lower costs, create economies of scale and geographic
scope, create large strong competitors, allow rapid movement
into new markets, allow diversification to minimize
shareholder exposure to business fluctuation, and let the most
efficient companies operate facilities, among other reasons.
2.
Discussion
a. The Role of Competition
The electric industry s rapid restructuring, and the
Commission s regulatory response to it, have made the effect
of mergers on competition, and the way the Commission
evaluates that effect, critically important.
The Open Access Rule was a watershed for electric
industry regulation
cient companies operate facilities, among other reasons.
2.
Discussion
a. The Role of Competition
The electric industry s rapid restructuring, and the
Commission s regulatory response to it, have made the effect
of mergers on competition, and the way the Commission
evaluates that effect, critically important.
The Open Access Rule was a watershed for electric
industry regulation. In the Rule, we recognized that, where
it exists, competition has become the best way to protect the
public interest and to ensure that electricity consumers pay
the lowest possible price for reliable service. Before the
Open Access Rule, the Commission took the approach that
traditional regulation could cure many market power problems.
The size of the company, the territory it covered, and the
31/ Such as UtiliCorp, Southern, PanEnergy, and Southwestern.
Docket No. RM96-6-000 - 20 -
assets it held did not matter greatly because regulatory
oversight could hold market power in check. Indeed, the
creation of larger utilities allowed some utilities to take
advantage of scale economies and pass the cost savings on to
consumers under regulatory supervision.
With the open transmission access resulting from the Open
Access Rule and the continuing evolution of competitive
wholesale power markets, we believe that competition is now
the best tool to discipline wholesale electric markets and
thereby protect the public interest. But the competition
needed to protect the public interest will not be efficient
and deliver lower prices in poorly structured markets. For
example, a concentration of generation assets that allows a
company to dominate a market will dampen or preclude the
benefits of competition. In sum, as customer protection is
increasingly dependent upon vibrant competition, it is
critically important that mergers be evaluated on the basis of
their effect on market structure and performance
r lower prices in poorly structured markets. For
example, a concentration of generation assets that allows a
company to dominate a market will dampen or preclude the
benefits of competition. In sum, as customer protection is
increasingly dependent upon vibrant competition, it is
critically important that mergers be evaluated on the basis of
their effect on market structure and performance. This
means that the Commission must find ways to assess more
accurately the competitive impact of merger proposals. In
doing so, however, we must be sensitive to another pressing
concern: the industry's need for more analytic and procedural
certainty from the Commission. The increased pace of merger
proposals has tested our ability to respond in a timely way.
We recognize that merger proposals are business decisions made
in response to market pressures and opportunities. Some
Docket No. RM96-6-000 - 21 -
merger proposals may strengthen weak firms and create stronger
competitors. Some, however, may result in firms that will
dominate or manipulate electricity markets and thwart
competition. In either case, applicants are entitled to
timely decisions from this Commission. The policies and
procedures adopted in this Policy Statement are intended to
promote that goal.
b. Definition of Markets
An accurate assessment of the effect on markets depends
on an accurate definition of the markets at issue. The
Commission's current analytic approach defines geographic
markets in a manner that does not always reflect accurately
the economic and physical ability of potential suppliers to
access buyers in the market. This approach uses what has come
to be known as a hub-and-spoke method. It identifies affected
customers as those that are directly interconnected with the
merging parties. It then identifies potential suppliers as:
roach defines geographic
markets in a manner that does not always reflect accurately
the economic and physical ability of potential suppliers to
access buyers in the market. This approach uses what has come
to be known as a hub-and-spoke method. It identifies affected
customers as those that are directly interconnected with the
merging parties. It then identifies potential suppliers as:
(1) those suppliers that are directly interconnected with the
customer (the "first-tier" suppliers); and (2) those suppliers
that are directly interconnected with the merging parties and
that the customer thus can reach through the merging parties'
open access transmission tariff (the "second-tier" suppliers).
A drawback of this method of defining geographic markets
is that it does not account for the range of parameters that
affect the scope of trade: relative generation prices,
transmission prices, losses, and transmission constraints.
Docket No. RM96-6-000 - 22 -
Taking these factors into account, markets could be broader or
narrower than the first- or second-tier entities identified
under the hub-and-spoke analysis. For example, a supplier
that is directly interconnected with a buyer may not be an
economic supplier to that buyer if transmission capability
across that interconnection is severely constrained or if the
transmission charges are greater than the difference between
the decremental cost of the buyer and the price at which the
supplier is willing to sell. In contrast, a supplier that is
three or four "wheels" away from the same buyer may be an
economic supplier if the sum of the wheeling charges and the
effect of losses is less than the difference between the
decremental cost of the buyer and the price at which the
supplier is willing to sell. In other words, mere proximity
is not always indicative of whether a supplier is an economic
alternative.
Another concern with the approach we have used in the
past is its analytic inconsistency
supplier if the sum of the wheeling charges and the
effect of losses is less than the difference between the
decremental cost of the buyer and the price at which the
supplier is willing to sell. In other words, mere proximity
is not always indicative of whether a supplier is an economic
alternative.
Another concern with the approach we have used in the
past is its analytic inconsistency. It defines the scope of
the market to include the directly interconnected utilities
that are accessible due to the applicants' open access tariff,
but does not expand the market to recognize the access
afforded by other utilities' tariffs. This was acceptable
before open access was established as an industry-wide
requirement for public utilities. Now that virtually all
public utilities have open access transmission tariffs on
file, it is no longer appropriate to recognize only the effect
Docket No. RM96-6-000 - 23 -
of certain entities' tariffs on the size of the market.
In modifying our competitive analysis, we are adopting
the Guidelines as the basic framework for evaluating the
competitive effects of merger proposals. The Guidelines are a
well-accepted standard approach for evaluating the competitive
effects of mergers, and they received substantial support from
commenters.
c. Use of the Guidelines
The Guidelines set out five steps for merger analysis:
(1) define markets likely to be affected by the merger and
measure the concentration and the increase in concentration in
those markets; (2) evaluate whether the extent of
concentration and other factors that characterize the market
raise concerns about potential adverse competitive effects;
commenters.
c. Use of the Guidelines
The Guidelines set out five steps for merger analysis:
(1) define markets likely to be affected by the merger and
measure the concentration and the increase in concentration in
those markets; (2) evaluate whether the extent of
concentration and other factors that characterize the market
raise concerns about potential adverse competitive effects;
(3) assess whether entry would be timely, likely, and
sufficient to deter or counteract any such concern; (4) assess
any efficiency gains that reasonably cannot be achieved by
other means; and (5) assess whether either party to the merger
would be likely to fail without the merger, causing its assets
to exit the market. We note, however, that the Guidelines are
just that -- guidelines. They provide analytical guidance but
do not provide a specific recipe to follow. Indeed, applying
the Guidelines to the electric power industry is one of our
biggest analytic challenges, both because the industry is
evolving very rapidly and because the industry has some unique
features, such as very limited opportunities for storage
Docket No. RM96-6-000 - 24 -
(hence the importance of time-differentiated markets). An
analysis that follows the Guidelines still requires many
assumptions and judgments to fit specific fact situations.
While this Policy Statement provides guidance on how the
Commission intends to more sharply focus its analysis of a
merger's effect on competition, we cannot reduce this analysis
to a purely mechanized computation of the same data inputs for
all merger applications. Rather, the Commission will need to
evaluate the relevant product and geographic markets affected
by each merger proposal; these markets, in turn, depend on the
specific characteristics of the merger applicants and the
products and markets in which they potentially trade
n, we cannot reduce this analysis
to a purely mechanized computation of the same data inputs for
all merger applications. Rather, the Commission will need to
evaluate the relevant product and geographic markets affected
by each merger proposal; these markets, in turn, depend on the
specific characteristics of the merger applicants and the
products and markets in which they potentially trade.
Consequently, mergers may require analysis of different
product and geographic markets due to factors (such as the
existence of constrained transmission paths) that affect the
size of a particular market or the hours in which trade of the
product is critical to determine whether merger applicants
possess market power. Such distinguishing factors will need
to be identified and analyzed on a case-by-case basis. Thus,
the analytical process explained in this Policy Statement is a
framework under which appropriate adjustments may be required
to be incorporated to take account of factors unique to a
merger. Furthermore, as noted above, this Policy Statement
also is intended to be sufficiently flexible to accommodate
the kinds of new merger proposals that will be presented to
the Commission as the energy industry evolves to meet the
Docket No. RM96-6-000 - 25 -
challenges of a more competitive marketplace.
We note that the Guidelines contemplate using remedies to
mitigate any harm to competition. There will be mergers
where, at the end of an analysis, market power concerns
persist but that could be made acceptable with measures to
mitigate potential market power problems. We encourage
applicants to identify market power problems and to propose
remedies for such problems in their merger proposals. In many
cases, such a remedy could avoid the need for a formal hearing
on competition issues and thus result in a quicker decision
n analysis, market power concerns
persist but that could be made acceptable with measures to
mitigate potential market power problems. We encourage
applicants to identify market power problems and to propose
remedies for such problems in their merger proposals. In many
cases, such a remedy could avoid the need for a formal hearing
on competition issues and thus result in a quicker decision.
As discussed further in Section III B (2)(e), if a proposed
long-term remedy is not capable of being effectuated at the
time the merger is consummated, applicants may propose
effective interim remedial measures.
d. Analytic Screen
It is important to give applicants some certainty about
how filings will be analyzed and what will be an adequate
showing that the merger would not significantly increase
market power. This will allow applicants to avoid or minimize
a hearing on this issue. Consequently, we will to use an
analytic screen (described in Appendix A) that is consistent
with the Guidelines. If applicants satisfy this analytic
screen in their filings, they typically would be able to avoid
a hearing on competition. We would expect applicants to
perform the screen analysis as part of their application and
to supply the Commission and the public with electronic files
Docket No. RM96-6-000 - 26 -
of all data used in the analysis as well as other related
specified data. The Commission will need this information in
order to perform its competitive analysis. If an adequately
supported screen analysis shows that the merger would not
significantly increase concentration, and there are no
interventions raising genuine issues of material fact that
cannot be resolved on the basis of the written record, the
Commission will not set this issue for hearing. Applicants
may, of course, submit an alternative competitive analysis in
addition to the screen.
The Commission believes that the screen will be a
valuable analytical tool in all cases
rease concentration, and there are no
interventions raising genuine issues of material fact that
cannot be resolved on the basis of the written record, the
Commission will not set this issue for hearing. Applicants
may, of course, submit an alternative competitive analysis in
addition to the screen.
The Commission believes that the screen will be a
valuable analytical tool in all cases. It is conservative
enough so that parties and the Commission can be confident
that an application that clears the screen would have no
adverse effect on competition. The screen also will be
valuable in identifying potential competitive problems early
in the process. The result will be more narrowly focused
issues at hearings when they are necessary. We also note that
the screen is intended to be somewhat flexible. It sets out a
general method, but we will consider other methods and factors
where applicants properly support them.
We believe that the analytic screen will produce a
reliable, conservative analysis of the competitive effects of
proposed mergers. However, it is not infallible. In some
cases, the screen may not detect certain market power
problems. There also may be disputes over the data used by
Docket No. RM96-6-000 - 27 -
applicants or over the way applicants have conducted the
screen analysis. These claims may be raised through
interventions and by the Commission staff. However, such
claims must be substantial and specific. In other words, they
should focus on errors in or other factual challenges to the
data or assumptions used in the analysis, or whether the
analysis has overlooked certain effects of the merger.
Unsupported, general claims of harm are insufficient grounds
to warrant further investigation of an otherwise comprehensive
analysis developed by the applicants. Intervenors may also
file an alternative competitive analysis, accompanied by
appropriate data, to support their arguments
or assumptions used in the analysis, or whether the
analysis has overlooked certain effects of the merger.
Unsupported, general claims of harm are insufficient grounds
to warrant further investigation of an otherwise comprehensive
analysis developed by the applicants. Intervenors may also
file an alternative competitive analysis, accompanied by
appropriate data, to support their arguments. The Commission
realizes that the need for more rigor in intervention showings
could require additional efforts by potential intervenors. We
will therefore routinely allow 60 days from filing for
intervenors and others to comment on a merger filing. 32/
A detailed illustrative description of the analytic
screen that we will use is in Appendix A. The following is a
brief summary of the screen. There are four steps the
applicant must complete and the Commission will follow:
(1) Identify the relevant products. Relevant products
are those electricity products or substitutes for
32/ Merger applicants that wish to facilitate the merger
review process should serve potential intervenors with
copies of their filing (via overnight delivery),
including electronic versions, when they file their
applications with the Commission. Cf. Open Access Rule,
61 FR 21,618 n.510.
Docket No. RM96-6-000 - 28 -
such products sold by the merging entities.
(2) Geographic markets: identify customers who may be
affected by the merger. Generally, these would
include, at a minimum, all entities directly
interconnected to a merging party and those that
historical transaction data indicate have traded
with a merging party.
Rule,
61 FR 21,618 n.510.
Docket No. RM96-6-000 - 28 -
such products sold by the merging entities.
(2) Geographic markets: identify customers who may be
affected by the merger. Generally, these would
include, at a minimum, all entities directly
interconnected to a merging party and those that
historical transaction data indicate have traded
with a merging party.
(3) Geographic markets: identify potential suppliers
that can compete to serve a given market or
customer. Suppliers must be able to reach the
market both physically and economically. There are
two parts to this analysis. One is determining the
economic capability of a supplier to reach a market.
This is accomplished by a delivered price test,
which accounts for the supplier's relative
generation costs and the price of transmission
service to the customer, including ancillary
services and losses. The second part evaluates the
physical capability of a supplier to reach the
customer, that is, the amount of electric energy a
supplier can deliver to a market based on
transmission system capability.
(4) Analyze concentration. Concentration statistics
must be calculated and compared with the market
concentration thresholds set forth in the
Docket No. RM96-6-000 - 29 -
Guidelines. 33/
The usefulness of the screen analysis depends critically on
the data that are supplied with the application. These data
are described in Appendix A. Applicants should file in
electronic format the data specified as well as any other data
used in their analysis.
If the Guidelines' thresholds are not exceeded, no
further analysis need be provided in the application. As
stated earlier, if an adequately supported screen analysis
shows that the merger would not significantly increase
concentration, and there are no interventions raising genuine
issues of material fact that cannot be resolved on the basis
of the written record, the Commission will not set this issue
for hearing
lds are not exceeded, no
further analysis need be provided in the application. As
stated earlier, if an adequately supported screen analysis
shows that the merger would not significantly increase
concentration, and there are no interventions raising genuine
issues of material fact that cannot be resolved on the basis
of the written record, the Commission will not set this issue
for hearing. If the thresholds are exceeded, then the
application should present further analysis consistent with
the Guidelines. The Commission will also consider any
applicant-proposed remedies at this stage. If none is
33/ The Guidelines address three ranges of market
concentration: (1) an unconcentrated post-merger market
-- if the post-merger Herfindahl-Hirschman Index (HHI) is
below 1000, regardless of the change in HHI the merger is
unlikely to have adverse competitive effects; (2) a
moderately concentrated post-merger market -- if the post
merger HHI ranges from 1000 to 1800 and the change in HHI
is greater than 100, the merger potentially raises
significant competitive concerns; and (3) a highly
concentrated post-merger market -- if the post-merger HHI
exceeds 1800 and the change in the HHI exceeds 50, the
merger potentially raises significant competitive
concerns; if the change in HHI exceeds 100, it is
presumed that the merger is likely to create or enhance
market power.
Docket No. RM96-6-000 - 30 -
presented, or if the analysis does not adequately deal with
the issues, we will need to examine the merger further.
The Commission will set for hearing the competitive
effects of merger proposals if they fail the above screen
analysis, if there are problems concerning the assumptions or
data used in the screen analysis, or if there are factors
external to the screen which put the screen analysis in doubt.
We may also set for hearing applications that have used an
alternative analytic method the results of which are not
adequately supported
he competitive
effects of merger proposals if they fail the above screen
analysis, if there are problems concerning the assumptions or
data used in the screen analysis, or if there are factors
external to the screen which put the screen analysis in doubt.
We may also set for hearing applications that have used an
alternative analytic method the results of which are not
adequately supported. As discussed in Section III F, the
Commission will attempt to summarily address issues where
possible and may use procedural mechanisms that permit us to
dispose of issues without having a trial-type hearing.
e. Mitigation
Although a competitive analysis pursuant to the
Guidelines may show that a proposed merger would have
anticompetitive effects, the Commission may be able to approve
the merger as consistent with the public interest if
appropriate mitigation measures can be formulated. In the
past, in some cases the Commission has conditionally approved
a merger if applicants agreed to conditions necessary to
mitigate anticompetitive effects. In some instances,
applicants themselves have voluntarily offered commitments to
address various concerns. 34/ Commenters suggested a variety
34/ E.g., Northeast Utilities Services Company/Re Public
Service Company of New Hampshire, 50 FERC 61,266,
Docket No. RM96-6-000 - 31 -
of conditions that we could impose (or remedies that
applicants could adopt voluntarily) to solve competitive
problems with a merger. These include, for example, the
formation of an Independent System Operator (ISO), divestiture
of assets, elimination of transmission constraints, efficient
regional transmission pricing, and offering an open season to
allow the merging utilities' customers to escape from their
contracts. Other commenters oppose some or all of these
remedies
y) to solve competitive
problems with a merger. These include, for example, the
formation of an Independent System Operator (ISO), divestiture
of assets, elimination of transmission constraints, efficient
regional transmission pricing, and offering an open season to
allow the merging utilities' customers to escape from their
contracts. Other commenters oppose some or all of these
remedies. Some commenters also argue that we should monitor
the situation after a merger and impose any new remedies that
are needed; other commenters oppose such post-merger review.
35/
As noted, the Commission's review of merger applications
has frequently resulted in the development of particular
conditions that are designed to remedy problems associated
with the merger. These conditions are imposed as part of our
approval of the merger application. We expect that practice
to continue. For example, we expect the competition analysis
(..continued)
reh'g denied, 51 FERC 61,177, clarification, 52
FERC 61,046 (1990), order on reh'g, 58 FERC
61,070 (1992), order on reh'g, 59 FERC 61,042
(1992), aff'd in part sub nom. Northeast Utilities
Services Company v. FERC, 993 F.2d 937 (1st Cir.
1993); Midwest Power Systems, Inc. and Iowa-Illinois
Gas & Electric Company, 71 FERC 61,386 (committed
to offer wholesale requirements customers an open
season).
35/ The comments on remedies are summarized in more
detail in Appendix D, Section VI D.
992), order on reh'g, 59 FERC 61,042
(1992), aff'd in part sub nom. Northeast Utilities
Services Company v. FERC, 993 F.2d 937 (1st Cir.
1993); Midwest Power Systems, Inc. and Iowa-Illinois
Gas & Electric Company, 71 FERC 61,386 (committed
to offer wholesale requirements customers an open
season).
35/ The comments on remedies are summarized in more
detail in Appendix D, Section VI D.
Docket No. RM96-6-000 - 32 -
to focus extensively on generation market power and on whether
a proposed merger exacerbates market power problems. We also
expect applicants to propose remedies for market power
problems identified in their analysis. It is our hope that as
our market power analysis becomes more refined to cope with
changing circumstances in the industry, applicant-proposed
remedies or mitigation strategies will also become more
refined or tailored to address the identified harm. Of
course, one remedy that an applicant could consider is to
propose to divest a portion of its generating capacity so that
its market share falls below the share that poses
anticompetitive concerns under the Guidelines. This remedy is
discussed in the Appendix A section entitled "Competitive
Analysis Screen."
Similarly, an applicant's ability to exercise generation
market power may be affected by transmission constraints and
transmission pricing. In particular, the scope of the
geographic market may be limited both by transmission
constraints and by the need to pay cumulative transmission
rates in order to transmit power across the systems of the
merging utilities and neighboring utilities. It is likely
that both market concentration and the applicant's market
share would be greater within such a circumscribed geographic
market. Hence, the opportunity to exercise market power also
would be greater. Potential remedies for such market power
could include the following. First, a proposal by the
nsmit power across the systems of the
merging utilities and neighboring utilities. It is likely
that both market concentration and the applicant's market
share would be greater within such a circumscribed geographic
market. Hence, the opportunity to exercise market power also
would be greater. Potential remedies for such market power
could include the following. First, a proposal by the
Docket No. RM96-6-000 - 33 -
applicants to turn over control of their transmission assets
to an ISO might mitigate market power. In particular, an ISO
might facilitate the implementation of efficient transmission
pricing and thereby expand the effective scope of the
geographic market. Second, an up-front, enforceable
commitment to upgrade or expand transmission facilities might
mitigate market power, because the constraint relieved by such
an upgrade or expansion no longer would limit the scope of the
relevant geographic market. These and other remedies also are
discussed in Appendix A. We intend to tailor conditions and
remedies to address the particular concerns posed by a merger
on a case-by-case basis.
If an applicant does not propose appropriate remedies to
mitigate the anticompetitive impact of a merger, the
Commission intends to fashion such remedies during the course
of its consideration of an application.
We do not intend to rely on post-merger review or on new
remedies imposed after a merger is approved. We must find
that a merger is consistent with the public interest before we
approve a merger. 36/ Moreover, heavy reliance on post-merger
review would expose the merging entities to too much
uncertainty. However, as the Commission has noted in past
36/ For example, an expansion or upgrade of facilities to
alleviate a transmission constraint would not be an
acceptable mitigation measure unless uncertainties about
the utilities' ability to complete the upgrade or
expansion are resolved prior to consummation of the
merger.
e the merging entities to too much
uncertainty. However, as the Commission has noted in past
36/ For example, an expansion or upgrade of facilities to
alleviate a transmission constraint would not be an
acceptable mitigation measure unless uncertainties about
the utilities' ability to complete the upgrade or
expansion are resolved prior to consummation of the
merger.
Docket No. RM96-6-000 - 34 -
merger cases, the Commission does retain authority under
section 203(b) to issue supplemental orders for good cause
shown as it may find necessary or appropriate. 37/
The Commission acknowledges that many of the solutions
that would mitigate market power or anticompetitive effects
cannot be implemented quickly and, in fact, could take an
extended period to accomplish (e.g., siting and constructing
new transmission lines to alleviate a transmission constraint,
divestiture of generation assets, formation of an ISO). While
long-term remedies may be necessary to allow the Commission to
determine that a merger is consistent with the public
interest, a requirement to satisfy such conditions prior to
consummating a merger may jeopardize the ability of parties to
merge. In turn, customers will experience unnecessary delays
in receiving benefits accruing from the merger. Therefore, we
will entertain proposals by merger applicants to implement
interim mitigation measures that would eliminate market power
concerns during the period that it takes to put in place the
long-term remedies necessary to address the anticompetitive
effects of their proposed merger. 38/ Such interim measures
must fully and effectively address the specific market power
37/ See FPA section 203(b), 16 U.S.C. 824b(b) (1994).
38/ For example, an applicant could sell its transmission
rights on congested transmission paths to third parties
or not trade in markets where it has market power until
long-term remedies are implemented.
heir proposed merger. 38/ Such interim measures
must fully and effectively address the specific market power
37/ See FPA section 203(b), 16 U.S.C. 824b(b) (1994).
38/ For example, an applicant could sell its transmission
rights on congested transmission paths to third parties
or not trade in markets where it has market power until
long-term remedies are implemented.
Docket No. RM96-6-000 - 35 -
problems identified for the merger but should not be viewed as
substitutes for the long-term remedies required by the
Commission. Applicants should implement long-term remedies as
quickly as practical.
C. Effect on Rates
1. Background
In determining whether a merger is consistent with the
public interest, one of the factors we have considered is the
effect the proposed merger will have on costs and rates. In
the past we have considered whether the elimination of the
independence of the companies and resulting combination of the
facilities of the separate entities would be likely to lead to
unnecessary rate increases or inhibit rate reductions. 39/ We
have also been concerned with whether the merged companies
would be able to operate economically and efficiently as a
single entity. 40/ In connection with these concerns, the
Commission has investigated applicants' claims about the
potential costs and benefits of their proposed mergers and
weighed that information to determine whether the costs are
likely to exceed the benefits. Our investigations have
frequently required trial-type hearings. Although we have
considered the applicants' burden of proof to be met by a
39/ Commonwealth, 36 FPC at 938.
40/ Edison, 47 FERC 61,196 at 61,672 (1989).
potential costs and benefits of their proposed mergers and
weighed that information to determine whether the costs are
likely to exceed the benefits. Our investigations have
frequently required trial-type hearings. Although we have
considered the applicants' burden of proof to be met by a
39/ Commonwealth, 36 FPC at 938.
40/ Edison, 47 FERC 61,196 at 61,672 (1989).
Docket No. RM96-6-000 - 36 -
generalized showing of likely costs and benefits, 41/ these
hearings have often been time-consuming, and there has been
considerable controversy over whether the estimates of future
costs and benefits are truly meaningful. Moreover, there has
been controversy over the position we have taken that benefits
are to be "counted" even if they could reasonably be obtained
by means other than the merger. There also has been
controversy over the allocation of the projected merger
benefits. 42/
In more recent cases, the Commission has focused on
ratepayer protection. We have either accepted a hold harmless
commitment (a commitment from the applicant that any net
merger-related costs will not raise rates) or have set for
hearing the issue of whether the applicants' hold harmless
commitment or some other proposed ratepayer protection was
adequate. For example, in Primergy, the Commission held that
wholesale ratepayers would be adequately protected if the
applicants were to commit that, for a period of four years
after the merger is consummated, the merging companies would
not seek to increase rates to wholesale requirements
41/ Entergy Services Inc. (Entergy), 65 FERC 61,332, at
62,473 (1993), order on reh'g, 67 FERC 61,192 (1994),
appeal pending.
42/ These benefits have included items such as fuel cost
savings; bankruptcy resolution; reducing administrative
and general costs; lowering net production costs; and
eliminating or deferring construction of new generating
units.
uirements
41/ Entergy Services Inc. (Entergy), 65 FERC 61,332, at
62,473 (1993), order on reh'g, 67 FERC 61,192 (1994),
appeal pending.
42/ These benefits have included items such as fuel cost
savings; bankruptcy resolution; reducing administrative
and general costs; lowering net production costs; and
eliminating or deferring construction of new generating
units.
Docket No. RM96-6-000 - 37 -
customers.
In PS Colorado, 43/ the applicants submitted evidence on
costs and benefits, but also proposed a hold harmless
commitment. We noted several concerns with the hold harmless
commitment, pointing out that it did not cover most of the
merger-related costs. 44/ We set for hearing the issue of
whether the applicants' hold harmless commitment provided
adequate protection for ratepayers (those who receive
unbundled generation and transmission services as well as
those who receive bundled service) and, if not, what ratepayer
protection mechanisms would be sufficient. We did not set for
hearing the effect on rates as such; that is, we did not
instruct the administrative law judge to conduct a factual
investigation into the alleged costs and benefits of the
merger. In Cincinnati Gas & Electric Company and PSI Energy,
Inc., the Commission modified the hold harmless provision,
stating that the applicants would have the burden of
convincingly demonstrating in future section 205 filings that
their wholesale customers had, in fact, been held harmless;
43/ 75 FERC at 62,043-44.
44/ The commitment was not to seek an increase in base rates
for five years after the merger. We found, however, that
this provided little protection, since the five years
would be over before most of the claimed merger savings
were projected to be realized
e section 205 filings that
their wholesale customers had, in fact, been held harmless;
43/ 75 FERC at 62,043-44.
44/ The commitment was not to seek an increase in base rates
for five years after the merger. We found, however, that
this provided little protection, since the five years
would be over before most of the claimed merger savings
were projected to be realized. Moreover, the applicants
proposed to amortize merger-related costs over five
years, but their hold harmless commitment covered only
costs that would be "booked to the merger" through the
first two years.
Docket No. RM96-6-000 - 38 -
that is, they would have to show any rate increase was not
related to the merger. 45/ The applicants would be required
to make an affirmative showing in their initial case-in-chief
that their proposed rates did not reflect merger-related costs
unless such costs were offset by merger-related benefits. 46/
In Union Electric, 47/ the applicants proposed an open
season guarantee for the first five years after the merger was
consummated. The open season guaranteed that existing
wholesale customers could terminate their contracts by giving
notice on the day the applicants filed for a rate increase
affecting that customer. The Commission was concerned that
the open season commitment might not provide adequate
protection for wholesale ratepayers (those that receive
bundled generation and transmission service as well as those
that receive unbundled generation or transmission service) and
set that issue for hearing
cts by giving
notice on the day the applicants filed for a rate increase
affecting that customer. The Commission was concerned that
the open season commitment might not provide adequate
protection for wholesale ratepayers (those that receive
bundled generation and transmission service as well as those
that receive unbundled generation or transmission service) and
set that issue for hearing. We stated that if at hearing it
was determined that the open season commitment was not
adequate protection, a determination should be made as to what
ratepayer protection mechanisms might be suitable for the
45/ See Cincinnati Gas & Electric Company and PSI Energy,
Inc., 64 FERC 61,237 at 62,714 (1993), order
withdrawing authorization of merger and instituting
settlement procedures, 66 FERC 61.028, order denying
rehearing and approving settlements and unilateral offers
as conditioned and modified, 69 FERC 61,005 (1994),
order granting clarification, 69 FERC 61,088 (1994).
46/ Id. at 62,714.
47/ 77 FERC 61,026 at 61,107-08 (1996), reh'g pending.
Docket No. RM96-6-000 - 39 -
proposed merger.
In response to the NOI, only a few commenters suggest
that we dispose of the effect on rates factor altogether. 48/
Most commenters consider this factor to be essential in
deciding whether to approve a merger. 49/ However, commenters
differ on how this factor should be assessed.
2. Discussion
We disagree with the argument presented by a few
commenters that we need not be concerned about the effect of a
merger on rates in this competitive environment because prices
will be set by market forces and customers can choose their
suppliers accordingly
tial in
deciding whether to approve a merger. 49/ However, commenters
differ on how this factor should be assessed.
2. Discussion
We disagree with the argument presented by a few
commenters that we need not be concerned about the effect of a
merger on rates in this competitive environment because prices
will be set by market forces and customers can choose their
suppliers accordingly. Also, while it may be true that most
of the rate issues in connection with the typical merger
affect retail ratepayers and are subject to state
jurisdiction, the Commission in order to ensure that a merger
is consistent with the public interest still must protect the
merging utilities' wholesale ratepayers and transmission
customers from the possible adverse effects of the merger. As
mentioned in our discussion above on the effect on competition
and in our discussion in the Open Access Rule, we recognize
that even in an open access environment, markets may not work
perfectly or even well. 50/ This is particularly the case
48/ See Appendix D, section III(A).
49/ Id.
50/ See Open Access Rule, 61 Fed. Reg. at 21,553.
Docket No. RM96-6-000 - 40 -
during the transition from a monopoly cost-of-service market
structure to a competitive market-based industry. For
instance, during the transition some customers may be unable
to take immediate advantage of competition because of
contractual commitments or because of stranded costs
obligations. Furthermore, because transmission remains
effectively a natural monopoly and will continue to be
regulated on a cost-of-service basis, the Commission has
reason to be concerned that mergers do not affect transmission
rates adversely. For these reasons, we will not abandon the
effect on rates factor. 51/
Rather than requiring estimates of somewhat amorphous net
merger benefits and addressing whether the applicant has
adequately substantiated those benefits, we will focus on
ratepayer protection
a cost-of-service basis, the Commission has
reason to be concerned that mergers do not affect transmission
rates adversely. For these reasons, we will not abandon the
effect on rates factor. 51/
Rather than requiring estimates of somewhat amorphous net
merger benefits and addressing whether the applicant has
adequately substantiated those benefits, we will focus on
ratepayer protection. Merger applicants should propose
ratepayer protection mechanisms to assure that customers are
protected if the expected benefits do not materialize. The
applicant bears the burden of proof to demonstrate that the
customer will be protected. This puts the risk that the
benefits will not materialize where it belongs -- on the
applicants.
Furthermore, we believe that the most promising and
expeditious means of addressing ratepayer protection is for
51/ In the past, we have referred to this factor as the
"effect on costs and rates." However, the basic concern
is with the effect on rates. Accordingly, we will refer
to it as the "effect on rates."
Docket No. RM96-6-000 - 41 -
the parties to negotiate an agreement on ratepayer protection
mechanisms. The applicants should attempt to resolve the
issue with customers even before filing, and should propose a
mechanism as part of their filing. Even if these negotiations
have not succeeded by the time of filing, the parties should
continue to try to reach a settlement. What constitutes
adequate ratepayer protection necessarily will depend on the
particular circumstances of the merging utilities and their
ratepayers, and we strongly encourage parties to minimize
contentious issues and to resolve them without the time and
expense of a formal hearing. Parties may not be able to reach
an agreement on an appropriate ratepayer protection and the
Commission may still be able to approve the merger
protection necessarily will depend on the
particular circumstances of the merging utilities and their
ratepayers, and we strongly encourage parties to minimize
contentious issues and to resolve them without the time and
expense of a formal hearing. Parties may not be able to reach
an agreement on an appropriate ratepayer protection and the
Commission may still be able to approve the merger. As
mentioned earlier, this could occur either after a hearing or
on the basis of parties' filings if we determine that the
applicants' proposal sufficiently insulates the ratepayers
from harm.
As described above, the Commission has accepted a variety
of hold harmless provisions, and parties may consider these as
well as other mechanisms if they appropriately address
ratepayer concerns. Among the types of protection that could
be proposed are:
open season for wholesale customers - applicants
agree to allow existing wholesale customers a
reasonable opportunity to terminate their contracts
(after notice) and switch suppliers. This allows
Docket No. RM96-6-000 - 42 -
customers to protect themselves from merger-related
harm.
general hold harmless provision - a commitment from
the applicant that it will protect wholesale
customers from any adverse rate effects resulting
from the merger for a significant period of time
following the merger. Such a provision must be
enforceable and administratively manageable.
moratorium on increases in base rates (rate freeze)
- applicants commit to freezing their rates for
wholesale customers under certain tariffs for a
significant period of time. 52/
rate reduction - applicants make a commitment to
file a rate decrease for their wholesale customers
to cover a significant period of time
a provision must be
enforceable and administratively manageable.
moratorium on increases in base rates (rate freeze)
- applicants commit to freezing their rates for
wholesale customers under certain tariffs for a
significant period of time. 52/
rate reduction - applicants make a commitment to
file a rate decrease for their wholesale customers
to cover a significant period of time. 53/
Although each mechanism provides some benefit to
ratepayers, we believe that in the majority of circumstances
the most meaningful (and the most likely to give wholesale
52/ A rate freeze, however, does not insulate the merged
utility from a rate reduction if the Commission, pursuant
to section 206, determines that the utility's rates are
no longer just and reasonable. Also, in circumstances in
which ratepayers clearly would be entitled to a rate
reduction in the absence of the merger, e.g., expiration
of a current surcharge or some other clearly defined
circumstance, a simple rate freeze may not provide
adequate ratepayer protection.
53/ Whether these types of proposals are appropriate in a
particular case will depend on the circumstances of the
merging companies and the customers and the details of
the proposals.
Docket No. RM96-6-000 - 43 -
customers the earliest opportunity to take advantage of
emerging competitive wholesale markets) is an open season
provision. We urge merger applicants to negotiate with
customers before filing and to offer an adequate open season
proposal or other appropriate ratepayer protection mechanism
in their merger applications. If intervenors raise a
substantial question as to the adequacy of the proposal,
parties should continue to pursue a settlement. If no
agreement can be reached, we may decide the issue on the
written record or set the issue for hearing.
D
customers before filing and to offer an adequate open season
proposal or other appropriate ratepayer protection mechanism
in their merger applications. If intervenors raise a
substantial question as to the adequacy of the proposal,
parties should continue to pursue a settlement. If no
agreement can be reached, we may decide the issue on the
written record or set the issue for hearing.
D. Effect on Regulation
When the Commission in Commonwealth referred to
impairment of effective regulation by this Commission and
appropriate state regulatory authorities, its concern was with
ensuring that there is no regulatory gap. 54/ The potential
for impairment of effective regulation at the Federal level
has been increased by the Ohio Power decision. 55/ That case
holds that if the SEC approves a contract for sales of non-
power goods or services between affiliates in a registered
holding company, this Commission in its rate review may not
disallow any part of the payment under the contract in order
54/ Cinergy, 64 FERC at 62,710 n.278; Commonwealth, 36 FPC at
931.
55/ Ohio Power Company v. FERC, 954 F.2d 779, 782-86 (D.C.
Cir. 1992), cert. denied, 498 U.S. 73 (1992) (Ohio
Power).
Docket No. RM96-6-000 - 44 -
to protect ratepayers against affiliate abuse. 56/
In recent cases, the Commission has developed its policy
regarding the effect of proposed mergers on both state and
Federal regulation. For instance, PS Colorado involved the
creation of a new multistate registered holding company. On
the question of a shift of regulation from the state
commissions to this Commission, we declined to order a
hearing, noting that the state commissions had authority to
disapprove the merger and that they did not argue that their
regulation would be impaired
both state and
Federal regulation. For instance, PS Colorado involved the
creation of a new multistate registered holding company. On
the question of a shift of regulation from the state
commissions to this Commission, we declined to order a
hearing, noting that the state commissions had authority to
disapprove the merger and that they did not argue that their
regulation would be impaired. On the question of a shift of
authority from this Commission to the SEC, we pointed out that
pre-merger, we had authority to review for rate purposes all
the costs the companies incurred, but if the merger were
approved, under Ohio Power we would lose that authority if the
SEC approved an inter-affiliate transaction. Thus, the costs
could be flowed through to ratepayers, even if the goods or
services were obtained at an above-market price or the costs
were imprudently incurred. To guard against this possibility,
we gave the applicants two options. 57/ They could either
choose to have the issue set for hearing, or they could agree
to abide by our policies on intra-system transactions. 58/
56/ Cf. AEP Power Marketing, Inc., 76 FERC 61,307 at 62,515
(1996).
57/ 75 FERC at 62,045-46.
58/ Accord, Union Electric, 77 FERC at 61,108-09 (state
expressed concern over shift of regulatory authority from
itself and this Commission to SEC; Commission noted that
Docket No. RM96-6-000 - 45 -
In response to the NOI, commenters generally argue that
it is important for the Commission to continue to look at the
effect of a merger on the effectiveness of state and Federal
regulation. 59/
2. Discussion
We will continue to examine the effect on regulation as a
factor in our analysis of proposed mergers and will use the
approach adopted in PSColorado and subsequent cases
-
In response to the NOI, commenters generally argue that
it is important for the Commission to continue to look at the
effect of a merger on the effectiveness of state and Federal
regulation. 59/
2. Discussion
We will continue to examine the effect on regulation as a
factor in our analysis of proposed mergers and will use the
approach adopted in PSColorado and subsequent cases. Thus, in
situations involving registered public utility holding
companies, we will require the applicants to choose between
two options and to make that choice clear in their filing.
They may commit themselves to abide by this Commission's
policies with respect to intra-system transactions within the
newly-formed holding company structure, or they may go to
hearing on the issue of the effect of the proposed registered
holding company structure on effective regulation by this
Commission. If applicants choose the first option, we will
set the issue for hearing only if intervenors raise credible
arguments that because of special factual circumstances, the
commitment will not provide sufficient protection.
With respect to the effect of a merger on state
regulatory authority, where a state has authority to act on a
merger, as in PSColorado, we ordinarily will not set this
(..continued)
state had authority to disapprove merger).
59/ Appendix B at Section IV.
Docket No. RM96-6-000 - 46 -
issue for a trial-type hearing. The application should tell
us whether the states have this authority. If the state lacks
this authority and raises concerns about the effect on
regulation, we may set the issue for hearing; we will address
these circumstances on a case-by-case basis.
E. Other Commonwealth Factors
The other Commonwealth factors are evidence of coercion,
the proposed accounting treatment, and the reasonableness of
the purchase price.
These three factors elicited very little comment
acks
this authority and raises concerns about the effect on
regulation, we may set the issue for hearing; we will address
these circumstances on a case-by-case basis.
E. Other Commonwealth Factors
The other Commonwealth factors are evidence of coercion,
the proposed accounting treatment, and the reasonableness of
the purchase price.
These three factors elicited very little comment. As to
evidence of coercion, a few commenters suggest that this
should be evaluated by the marketplace rather than by the
regulatory process. 60/ Several commenters say that this
factor should be considered only if someone demonstrates that
it is relevant. 61/ OK Com is among the few commenters who
favor retaining this factor. It suggests that coercion is a
means by which some companies will try to gain oligopolistic
control of the market in the coming competitive environment.
As to accounting treatment, some commenters support
elimination of accounting concerns as a factor. 62/
60/ East Texas Coop., EEI, PaineWebber, and Southern
Company.
61/ Florida and Montaup.
62/ East Texas Coop, EEI, and PaineWebber. Although they do
not support keeping this factor, EEI and PaineWebber
suggest that in light of broad industry changes, this may
be the right time for a generic re-examination of
accounting concerns, of which accounting for mergers
could be a part.
Docket No. RM96-6-000 - 47 -
PaineWebber notes that most recent mergers were mergers of
equals, involving minimal premiums over current market prices.
It suggests that a similar market discipline would likely
cause shareholders to reject merger transactions involving
large merger premiums and excessive amortization. Florida and
Montaup argue that the accounting treatment of a merger should
not be an issue for hearing unless an applicant seeks
treatment different from the Commission's standards
minimal premiums over current market prices.
It suggests that a similar market discipline would likely
cause shareholders to reject merger transactions involving
large merger premiums and excessive amortization. Florida and
Montaup argue that the accounting treatment of a merger should
not be an issue for hearing unless an applicant seeks
treatment different from the Commission's standards. Southern
Company contends that the Commission's analysis of this factor
should be subsumed within the analysis of the merger's impact
on costs and rates.
NY Com and OK Com are concerned about the accounting
consequences of mergers. OK Com favors keeping the historical
cost approach to accounting for plant acquisitions during
mergers and business combinations until competitive market
structures are achieved at the national, regional, and state
levels. NY Com also urges the Commission to continue to
require unrestricted access to all books and records of newly
merged entities.
We also received a few comments on looking at the
reasonableness of the purchase price as a factor. A number of
commenters 63/ urge that the Commission not substitute its
judgment for the workings of market forces, which will
determine the reasonableness of the purchase price. Others
63/ CINergy, East Texas Coop, EEI, PaineWebber, and Southern.
Docket No. RM96-6-000 - 48 -
64/ believe that this issue should be examined only if its
relevance is raised. However, OK Com argues that purchase
price still has some relevance in this era of diversification.
It is concerned that the purchase price may be based on
expected returns on non-regulated investments, which, if they
fail to materialize, may dilute the value of utility stock.
We will no longer consider these three matters as
separate factors. Any evidence of coercion will be considered
as part of our analysis of the effect of the merger on
competition
in this era of diversification.
It is concerned that the purchase price may be based on
expected returns on non-regulated investments, which, if they
fail to materialize, may dilute the value of utility stock.
We will no longer consider these three matters as
separate factors. Any evidence of coercion will be considered
as part of our analysis of the effect of the merger on
competition. We have treated the reasonableness of the
purchase price as an issue only insofar as it affects rates,
so this issue is subsumed in the effect on rates factor. As
for the proposed accounting treatment, this is not really a
factor to be balanced along with other factors; proper
accounting treatment is simply a requirement for all mergers.
65/
If a merger application seeks to recover acquisition
premiums through wholesale rates, we will address the issue in
post-merger rate applications. However, the Commission
historically has not permitted rate recovery of acquisition
premiums.
64/ Florida and Montaup.
65/ See, e.g., Public Service Company of Colorado and
Southwestern Public Service Company, 75 FERC 61,325
(1996); Entergy Services, Inc. and Gulf States Utilities
Company, Opinion No. 385, 65 FERC 61,332 (1993), order
on reh'g, 67 FERC 61,192 (1994).
Docket No. RM96-6-000 - 49 -
F. Procedures for Handling Merger Cases
We received many suggestions as to how to improve our
procedures for handling merger cases. The commenters focused
particularly on the need for certainty and the need to
expedite the process, at least for some mergers. They
suggested various screens or hold harmless provisions. Some
suggested that we set forth filing requirements. There were
also many comments on coordination with other agencies that
are reviewing the merger
to improve our
procedures for handling merger cases. The commenters focused
particularly on the need for certainty and the need to
expedite the process, at least for some mergers. They
suggested various screens or hold harmless provisions. Some
suggested that we set forth filing requirements. There were
also many comments on coordination with other agencies that
are reviewing the merger. 66/
Although we plan to issue a Notice of Proposed Rulemaking
in the near future to set forth more specific filing
requirements consistent with this Policy Statement and
additional procedures for improving the merger hearing
process, we have determined that the best way to improve the
Commission's handling of merger proposals is to update our
merger review policy. As outlined in this Policy Statement,
we will generally limit the number of factors we examine in
order to determine whether a merger is in the public interest.
The principal area that will require a fact-based review
is the effect of a proposed merger on competition. By using
the Guidelines as a screen and by informing applicants of the
type of information we expect them to file with us when they
apply, we hope to expedite our review of applications
considerably.
66/ Appendix D, Section VI.
Docket No. RM96-6-000 - 50 -
As discussed above under "Effect on Competition," "Effect
on Rates," and "Effect on Regulation," we are setting forth
for each factor guidance to enable merger applicants
ordinarily to avoid a trial-type hearing or to have a hearing
focused on limited issues. Moreover, we have set forth above
under "Effect on Competition" and in Appendix A the
information that we think we need at this point to determine
whether a merger would impair competition. We have also
discussed ways to mitigate anticompetitive effects
each factor guidance to enable merger applicants
ordinarily to avoid a trial-type hearing or to have a hearing
focused on limited issues. Moreover, we have set forth above
under "Effect on Competition" and in Appendix A the
information that we think we need at this point to determine
whether a merger would impair competition. We have also
discussed ways to mitigate anticompetitive effects. Our
consideration of the other two factors, the effect on rates
and the effect on regulation, should not require a lot of data
or analysis, since we will be relying primarily on the
applicants' commitments. This should make it possible for
applicants to make filings that can be processed more quickly.
The Commission intends to propose a rule to set forth
detailed filing requirements.
Another step that can make our processing of merger
applications more efficient is to discourage redundant or
irrelevant pleadings. We agree with commenters who argue that
we should not consider extraneous issues, and we will not
consider interventions that raise matters unrelated to the
merger. Moreover, in the past, the process has been bogged
down by repetitive filings such as answers to answers. We
will not consider such filings, nor will we consider "new"
information unless it is genuinely new and relevant.
With all the streamlining changes discussed above, we
Docket No. RM96-6-000 - 51 -
believe that we will be able to act on mergers more quickly
after a complete application is filed. A complete application
is one that adequately and accurately describes the merger
being proposed and that contains all the information necessary
to explain how the merger is consistent with the public
interest, including an evaluation of the merger's effect on
competition, rates, and regulation. 67/ We expect applicants
to be able to provide all the necessary information, given the
guidance in this Policy Statement
one that adequately and accurately describes the merger
being proposed and that contains all the information necessary
to explain how the merger is consistent with the public
interest, including an evaluation of the merger's effect on
competition, rates, and regulation. 67/ We expect applicants
to be able to provide all the necessary information, given the
guidance in this Policy Statement. We also emphasize that
applicants should not expect speedy action if their merger
proposals change, as has frequently happened in the past. The
Commission cannot be expected to act quickly on a moving
target. If applicants change the mechanism or terms under
which they intend to merge or supplement the supporting
information in their application, the Commission's review
process will restart.
Once we have a complete application, we will make every
reasonable effort to issue an initial order 60-90 days after
the comment period closes. An initial order could take any of
several actions, including: requesting additional information
from the applicants or intervenors; setting some or all issues
67/ The information would include all applicable exhibits and
accompanying testimony and other data that will
constitute applicants' showing that the merger is
consistent with the public interest. In addition, a copy
of all applications or other information filed with other
regulatory bodies regarding the merger must be provided
to the Commission to initiate our review process.
67/ The information would include all applicable exhibits and
accompanying testimony and other data that will
constitute applicants' showing that the merger is
consistent with the public interest. In addition, a copy
of all applications or other information filed with other
regulatory bodies regarding the merger must be provided
to the Commission to initiate our review process.
Docket No. RM96-6-000 - 52 -
for a trial-type or paper hearing; approving the merger; or
rejecting the merger. If we determine in the initial order
that further procedures are necessary, we will choose among
the available procedural options based on the completeness of
the record before us, the types of issues that need to be
resolved (factual, policy or legal), and the need to give
parties adequate due process. However, we are hopeful that
the guidance in this Policy Statement will result in more
complete applications and more focused and detailed
interventions and that we will be able to act summarily on
many (or in some cases all) issues in the initial order.
If the Commission determines in an initial order that
trial-type or paper hearing procedures are necessary, we
believe that we will be able to issue a final order on most
applications within 12-15 months from the date that the
completed application was filed. We emphasize that this
assumes no significant changes in the proposal; any such
changes will start the process over and will require that a
new notice be issued. Of course, some applications will take
more time than others. For example, if a merger raises
extraordinarily complex factual disputes, or if the
development of competitive remedies or hold harmless
agreements is entirely deferred to the hearing, case
processing may take longer. On the other hand, if a merger
falls below the HHI screen, the applicants propose adequate
ratepayer protection mechanisms, and the applicants make the
ore time than others. For example, if a merger raises
extraordinarily complex factual disputes, or if the
development of competitive remedies or hold harmless
agreements is entirely deferred to the hearing, case
processing may take longer. On the other hand, if a merger
falls below the HHI screen, the applicants propose adequate
ratepayer protection mechanisms, and the applicants make the
Docket No. RM96-6-000 - 53 -
commitments necessary to assuage our concerns about the effect
on regulation, we should be able to act much more quickly.
The Commission believes that in order to meet routinely
the target dates we have set forth in this Policy Statement,
it is appropriate to reexamine whether our procedures for
processing merger applications, including hearing procedures,
can be tailored better to meet the specific needs of
participants in merger proceedings. To that end, in the
proposed rulemaking on information filing requirements (see
note 3), we will also request public comment on merger
processing procedures.
We will not delay our processing of merger applications
to allow the states to complete their review, as some
commenters suggest. However, we will be willing to consider
late interventions by state commissions where it is
practicable to do so. In cases where a state commission asks
us to address the merger's effect on retail markets because it
lacks adequate authority under state law, we will do so.
In response to commenters who are concerned that our
decisions be consistent with those of other agencies, we note
that since we are adopting the Guidelines as a framework for
our analysis of the effect on competition, our analysis should
be generally consistent with the DOJ's and the FTC's analyses.
G. Other Issues
According to FERC Policy Project, recent changes in the
industry may make mergers financially unattractive without
hat our
decisions be consistent with those of other agencies, we note
that since we are adopting the Guidelines as a framework for
our analysis of the effect on competition, our analysis should
be generally consistent with the DOJ's and the FTC's analyses.
G. Other Issues
According to FERC Policy Project, recent changes in the
industry may make mergers financially unattractive without
Docket No. RM96-6-000 - 54 -
planning and operational changes; these changes can harm the
environment. FERC Policy Project argues that we should revise
our rule that provides that merger applications will not
generally require preparation of an EIS or EA. The rule
"categorically excludes" mergers unless circumstances indicate
that the action may be a major Federal action significantly
affecting the qualify of the human environment. 68/ FERC
Policy Project also argues that the effect on the environment
should be considered as a factor in deciding whether to
approve a merger. Moreover, it believes we should require
applicants to provide with their applications information on
the environmental effects of the merger and that we should
require mitigation of environmental effects through various
means.
The Commission has recognized that a particular merger
can have environmental effects and has been willing to study
the issue in an individual case where it is justified. 69/ We
do not see the need to change our regulation, which explicitly
addresses the possibility that an EA or EIS may, on rare
occasions, be needed. However, both our categorical exclusion
rule and the absence of environmental concerns from the list
of three factors in this Policy Statement reflect the simple
fact that most mergers do not present environmental concerns.
68/ 18 C.F.R. 380.4(a)(16) and (b) (1996).
69/ See Southern California Edison Company, 47 FERC 61,196
r EIS may, on rare
occasions, be needed. However, both our categorical exclusion
rule and the absence of environmental concerns from the list
of three factors in this Policy Statement reflect the simple
fact that most mergers do not present environmental concerns.
68/ 18 C.F.R. 380.4(a)(16) and (b) (1996).
69/ See Southern California Edison Company, 47 FERC 61,196
(1989), order on reh'g, 49 FERC 61,091 (1989).
Docket No. RM96-6-000 - 55 -
Low-Income Representatives argues that the "public
interest" standard requires us to consider matters such as the
need for service to all households, the need for consumer
input into the decisions made by utilities, and other matters.
We clarify that the three factors discussed in this Policy
Statement are not necessarily the only factors that make up
the public interest, and, if appropriate, we will consider
other matters that are under our jurisdiction. However, we
believe such matters as the need for service to all households
are more appropriately the concern of the states.
IV. Administrative Effective Date and Congressional
Notification
Under the terms of 5 U.S.C. 553 (d)(2), this Policy
Statement is effective immediately. The Commission has
determined, with the concurrence of the Administrator of the
Office of Information and Regulatory Affairs of the Office of
Management and Budget, that this Policy Statement is not a
major rule within the meaning of section 351 of the Small
Business Regulatory Enforcement Act of 1996. 70/ The
Commission is submitting the Merger Policy Statement to both
Houses of Congress and to the Comptroller General.
70/ 5 U.S.C. 804 (2).
Office of Information and Regulatory Affairs of the Office of
Management and Budget, that this Policy Statement is not a
major rule within the meaning of section 351 of the Small
Business Regulatory Enforcement Act of 1996. 70/ The
Commission is submitting the Merger Policy Statement to both
Houses of Congress and to the Comptroller General.
70/ 5 U.S.C. 804 (2).
Docket No. RM96-6-000 - 56 -
List of Subjects in 18 CFR Part 2
Administrative Practice and Procedure, Electric power,
Natural gas, Pipelines, Reporting and recordkeeping
requirements.
By the Commission.
( S E A L )
Lois D. Cashell,
Secretary.
Docket No. RM96-6-000 - 57 -
In consideration of the foregoing, the Commission amends
Part 2, Chapter I, Title 18 of the Code of Federal Regulations
as set forth below.
Part 2 -- GENERAL POLICY AND INTERPRETATIONS
1. The authority citation for Part 2 continues to read as
follows:
Authority - 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C.
792-825y, 2601-2645; 42 U.S.C. 4321-4361, 7101-7352.
2. Part 2 is amended by adding 2.26, to read as follows:
2.26 Policies concerning review of applications under
section 203
(a) The Commission has adopted a Policy Statement on its
policies for reviewing transactions subject to section 203.
That Policy Statement can be found at 77 FERC 61,263, 61 FR
( , 1996). The Policy Statement is a
complete description of the relevant guidelines. Paragraphs
(b) - (e) of this section are only a brief summary of the
Policy Statement.
under
section 203
(a) The Commission has adopted a Policy Statement on its
policies for reviewing transactions subject to section 203.
That Policy Statement can be found at 77 FERC 61,263, 61 FR
( , 1996). The Policy Statement is a
complete description of the relevant guidelines. Paragraphs
(b) - (e) of this section are only a brief summary of the
Policy Statement.
(b) Factors Commission will generally consider. In
determining whether a proposed transaction subject to section
203 is consistent with the public interest, the Commission
will generally consider the following factors; it may also
consider other factors:
(1) the effect on competition;
(2) the effect on rates; and
(3) the effect on regulation.
Docket No. RM96-6-000 - 58 -
(c) Effect on competition. Applicants should provide
data adequate to allow analysis under the Department of
Justice/Federal Trade Commission Merger Guidelines, as
described in the Policy Statement and Appendix A to the Policy
Statement.
(d) Effect on rates. Applicants should propose
mechanisms to protect customers from costs due to the merger.
If the proposal raises substantial issues of relevant fact,
the Commission may set this issue for hearing.
(e) Effect on regulation. (1) Where the merged entity
would be part of a registered public utility holding company,
if applicants do not commit in their application to abide by
this Commission's policies with regard to affiliate
transactions, the Commission will set the issue for a trial-
type hearing;
(2) Where the affected state commissions have authority
to act on the transaction, the Commission will not set for
hearing whether the transaction would impair effective
regulation by the state commission. The application should
state whether the state commissions have this authority.
ies with regard to affiliate
transactions, the Commission will set the issue for a trial-
type hearing;
(2) Where the affected state commissions have authority
to act on the transaction, the Commission will not set for
hearing whether the transaction would impair effective
regulation by the state commission. The application should
state whether the state commissions have this authority.
(3) Where the affected state commissions do not have
authority to act on the transaction, the Commission may set
for hearing the issue of whether the transaction would impair
effective state regulation.
Docket No. RM96-6-000 - 59 -
Appendix A
Competitive Analysis Screen
The analytic screen provides applicants with a standard
analytic method and data specification to allow the Commission
to quickly determine whether a proposed merger presents market
power concerns. Some past merger cases were delayed or set
for hearing because an adequate analysis was not part of the
application or because sufficient data that would allow the
Commission to corroborate or independently check applicants
conclusions was not provided in the application. This is
especially true regarding the effect that transmission prices
and capability may have on the scope of the geographic market.
The chances for hearings and delays will be reduced if the
screen analysis and data described below are filed with the
application.
A.
Consistency With DOJ Guidelines
In this policy statement, the Commission has adopted the
DOJ Merger Guidelines (the Guidelines) 71/ as the basic
framework for evaluating the competitive effects of proposed
mergers. The analytic screen applies the Guidelines. Before
describing the screen, the Guidelines are briefly summarized
so that the screen s consistency with them is clear.
71/ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, 57 Fed. Reg. 41,552 (1992).
1/ as the basic
framework for evaluating the competitive effects of proposed
mergers. The analytic screen applies the Guidelines. Before
describing the screen, the Guidelines are briefly summarized
so that the screen s consistency with them is clear.
71/ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, 57 Fed. Reg. 41,552 (1992).
Docket No. RM96-6-000 - 60 -
In general, the Guidelines set out five steps for merger
analysis: (1) assess whether the merger would significantly
increase concentration; (2) assess whether the merger could
result in adverse competitive effects; (3) assess whether
entry could mitigate the adverse effects of the merger; (4)
assess whether the merger results in efficiency gains not
achievable by other means; and (5) assess whether, absent the
merger, either party would likely fail, causing its assets to
exit the market.
The analytic screen focuses primarily on the Guidelines
first step. This step can be broken down into two components:
Defining product and geographic markets that are likely
to be affected by a proposed merger and measuring
concentration in those markets. The products to consider are
those sold by the merging parties. The Guidelines suggest a
way of defining geographic markets based on identifying the
suppliers that are feasible alternative suppliers to the
merged firm from a buyer s perspective: the hypothetical
monopolist test. Essentially, if a hypothetical and
unregulated monopoly that owned all the supplies inside the
geographic market being tested could profitably sustain a
small but significant price increase (i.e., suppliers external
to the market are not, by definition, sufficiently good
substitutes for the buyers in the market), then the limit of
the geographic market has been reached. 72/ The
72/ The Guidelines suggest that a 5% price increase be used
the supplies inside the
geographic market being tested could profitably sustain a
small but significant price increase (i.e., suppliers external
to the market are not, by definition, sufficiently good
substitutes for the buyers in the market), then the limit of
the geographic market has been reached. 72/ The
72/ The Guidelines suggest that a 5% price increase be used
Docket No. RM96-6-000 - 61 -
sustainability of a price increase depends on both sellers
entering the market and the response of buyers to the
increase. The concentration of suppliers included in the
market is then measured (by summary statistics such as the
Herfindahl-Hirschman Index, or HHI, and single seller market
share) and used as an indicator of the potential for market
power.
Evaluating the change in concentration using the
Guidelines thresholds to indicate problematic mergers. The
Guidelines address three ranges of market concentration: (1)
an unconcentrated post-merger market -- if the post-merger HHI
is below 1000, regardless of the change in HHI the merger is
unlikely to have adverse competitive effects; (2) a moderately
concentrated post-merger market -- if the post merger HHI
ranges from 1000 to 1800 and the change in HHI is greater than
100, the merger potentially raises significant competitive
concerns; and (3) a highly concentrated post-merger market --
if the post-merger HHI exceeds 1800 and the change in the HHI
exceeds 50, the merger potentially raises significant
competitive concerns; if the change in HHI exceeds 100, it is
presumed that the merger is likely to create or enhance market
power. 73/
(..continued)
for the test, but allow that larger or smaller price
increases may also be appropriate. DOJ Guidelines at
41555.
73/ DOJ Guidelines at 41558.
r 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. 73/
(..continued)
for the test, but allow that larger or smaller price
increases may also be appropriate. DOJ Guidelines at
41555.
73/ DOJ Guidelines at 41558.
Docket No. RM96-6-000 - 62 -
If the concentration analysis indicates that a proposed
merger may significantly increase concentration in any of the
relevant markets, the Guidelines suggest examination of other
factors that either address the potential for adverse
competitive effect or that could mitigate or counterbalance
the potential competitive harm. Such factors include the ease
of entry in the market and any efficiencies stemming from the
merger. 74/ If the additional factors examined do not
mitigate or counterbalance the adverse competitive effects of
the merger, remedial conditions would be explored at this
stage.
B.
Analytic Screen Components
There are four steps to the screen analysis.
1.
Identify the relevant products.
The first step is to identify one or more products sold
by the merging entities. Products may be grouped together
when they are good substitutes for each other from the buyer s
perspective. If two products are not good substitutes, an
entity with market power can raise the price of one product
and buyers would have a limited ability to shift their
purchases to other products. In the past, the Commission has
analyzed three products: non-firm energy, short-term capacity
74/ In assessing market concentration, the Guidelines state
"...market share and concentration data provide only the
starting point for analyzing the competitive impact of a
merger." DOJ Guidelines at 41558 .
ave a limited ability to shift their
purchases to other products. In the past, the Commission has
analyzed three products: non-firm energy, short-term capacity
74/ In assessing market concentration, the Guidelines state
"...market share and concentration data provide only the
starting point for analyzing the competitive impact of a
merger." DOJ Guidelines at 41558 .
Docket No. RM96-6-000 - 63 -
(firm energy), and long-term capacity. 75/ These remain
reasonable products under the prevailing institutional
arrangements, and applicants should recognize such products in
their analysis. Other product definitions may also be
acceptable. For example, the lack of on-site buyer storage
creates products differentiated by time. Thus, peak and off-
peak energy (seasonal and daily) may be distinct products.
The Commission encourages parties to propose even more
precise definitions of relevant products where appropriate.
Indeed, we would expect to see greater precision in product
differentiation as market institutions develop.
2.
Geographic markets: identify customers who may be
affected by the merger.
This is the first of a two-step process of determining
the geographic size of the market. To identify customers
potentially affected by a merger, at a minimum, applicants
should include all entities directly interconnected to either
of the merging parties. Additional entities should be
included in the analysis if historical transaction data
indicates such entities have been trading partners with a
merging party. Applicants and others may argue either that
there are other customers to be included as relevant buyers or
75/ See Baltimore Gas & Electric and Potomac Electric Power
Company, 76 FERC 61,111 (1996) at 61,572. The factor
that is considered in evaluating long term capacity
markets is the effect of a merger on barriers to entry
into those markets.
th a
merging party. Applicants and others may argue either that
there are other customers to be included as relevant buyers or
75/ See Baltimore Gas & Electric and Potomac Electric Power
Company, 76 FERC 61,111 (1996) at 61,572. The factor
that is considered in evaluating long term capacity
markets is the effect of a merger on barriers to entry
into those markets.
Docket No. RM96-6-000 - 64 -
that identified customers are not relevant buyers.
Intervenors also may argue that other customers not identified
by the applicants will be affected by the merger.
3.
Geographic markets: identify potential suppliers to
each identified customer.
This second, and key, step in determining the size of the
geographic market is to identify those suppliers that can
compete to serve a given market or customer and how much of a
competitive presence they are in the market. Alternative
suppliers must be able to reach the market both economically
and physically. There are two parts to this analysis. One is
determining the economic capability of a supplier to reach a
market. This is accomplished by a delivered price test. The
second part evaluates the physical capability of a supplier to
reach a market, i.e., the amount of the defined product a
supplier can deliver to a market based on transmission
capacity availability.
Supply and demand conditions in electricity markets vary
substantially over time, and the market analysis must take
those varying conditions into account. Applicants should
present separate analyses for each of the major periods when
supply and demand conditions are similar. One way to do this
is to group together the hours when supply and demand
conditions are similar; for example, peak, shoulder and off-
peak hours. There may even be smaller groupings to reflect
periods of significantly constrained transmission capability
ns into account. Applicants should
present separate analyses for each of the major periods when
supply and demand conditions are similar. One way to do this
is to group together the hours when supply and demand
conditions are similar; for example, peak, shoulder and off-
peak hours. There may even be smaller groupings to reflect
periods of significantly constrained transmission capability
Docket No. RM96-6-000 - 65 -
available for suppliers to reach a market.
The screen analysis also examines historical trade data
as a check on which suppliers should be included in the
relevant markets.
a.
Delivered price test.
The screen analysis should first identify those suppliers
with the potential to economically supply power to the
destination market or customer. The merging companies as well
as non-traditional suppliers should be included in this test
to identify potential suppliers. Basically, suppliers should
be included in a market if they could deliver the product to a
customer at a cost no greater than 5% above the competitive
price to that customer. 76/ The delivered cost of the product
to the relevant market for each potential supplier is found by
adding the potential supplier s variable generation costs and
all transmission and ancillary service charges that would be
incurred to make the delivery. 77/ Thus, the farther away a
supplier, the more transmission and ancillary service prices
that must be added to its power costs. Suppliers that would
have to traverse a non-open access system can be included as
potential suppliers only to the extent they have firm access
76/ The Guidelines suggest a 5% price threshold but
acknowledge that others may be appropriate. Applicants
have the burden of justifying a different price
threshold.
77/ This would include the unbundled transmission rates of a
seller that is a vertically integrated public utility.
system can be included as
potential suppliers only to the extent they have firm access
76/ The Guidelines suggest a 5% price threshold but
acknowledge that others may be appropriate. Applicants
have the burden of justifying a different price
threshold.
77/ This would include the unbundled transmission rates of a
seller that is a vertically integrated public utility.
Docket No. RM96-6-000 - 66 -
rights. The analysis should also take into account the effect
of line losses on the economics of trade with a distant
supplier.
If a supplier can deliver the product to the market at a
cost no more than 5% above the market price,that supplier
should be included in the geographic market. Applicants are
expected to provide product-specific delivered price estimates
for each destination market or customer.
The delivered price test uses the following data.
Applicants should provide in electronic format these data and
any other data relied upon in their analysis.
C
Transmission prices. Applicants should use the
ceiling prices in utilities open access tariffs on
file with the Commission. Where a non-
jurisdictional entity s transmission system is
involved, the ceiling price in its NJ tariff should
be used. If the entity has not filed an NJ tariff,
applicants should use their best efforts to secure
or estimate transmission ceiling prices. Prices
that are not found in a tariff on file with the
Commission should be adequately supported. While we
are aware that ceiling prices are frequently
discounted, this screen analysis is to be
conservative. Applicants may present an additional
alternative analysis using discounted prices if they
can support it with evidence that discounting is and
r estimate transmission ceiling prices. Prices
that are not found in a tariff on file with the
Commission should be adequately supported. While we
are aware that ceiling prices are frequently
discounted, this screen analysis is to be
conservative. Applicants may present an additional
alternative analysis using discounted prices if they
can support it with evidence that discounting is and
Docket No. RM96-6-000 - 67 -
will be available.
C
Potential suppliers generation costs. The
Commission will consider various measures of costs.
Applicants are free to use any appropriate cost
data as long as it is verifiable and supported with
reasoned analysis. Possibilities include generating
plant cost data from the FERC Form 1 annual reports
or unit specific data. Another is system lambda
data. Either of these data can be used to calculate
a potential supplier s costs at various time periods.
Other measures or data sources may also be
appropriate. The Commission has not reached a firm
conclusion on a specific cost measure.
C
Competitive market price. Electricity markets have
not sufficiently matured yet to exhibit single
market clearing prices for various products. In
addition, price discovery is difficult because the
reporting of actual transaction prices is still in
its formative stage. Until market institutions
mature enough to reveal single market clearing
prices, applicants may use surrogate measures as
long as they are properly supported. For example, a
buyer s system lambda may be used because a buyer is
not likely to purchase from a supplier that is more
costly than its own costs of production at specific
actual transaction prices is still in
its formative stage. Until market institutions
mature enough to reveal single market clearing
prices, applicants may use surrogate measures as
long as they are properly supported. For example, a
buyer s system lambda may be used because a buyer is
not likely to purchase from a supplier that is more
costly than its own costs of production at specific
Docket No. RM96-6-000 - 68 -
times. 78/ Another possibility might be the price
at which the affected customer has been purchasing
power.
For each supplier, the screen analysis should then show
the amount of each product the supplier could supply to the
market. Generation capacity measures are appropriate for this
showing. 79/ Different capacity measures should be used, as
appropriate, for different products. It is also appropriate,
even desirable, to use several measures for one product.
Given that competitive analysis is an inexact science and that
electricity markets are changing rapidly, using several
measures for a particular product will corroborate the result
of the analysis. While the Commission has not firmly decided
on specific measures for analyzing products, the following
discussion of capacity measures is intended to offer guidance
on this matter. These are some ways to measure a supplier s
ability to supply a particular product to a market. They are
not product definitions.
C
Economic capacity. This is the most important of
the measures because it determines which suppliers
78/ System lambda data are usually reported by control area.
For smaller entities that are within a control area, the
area s system lambda may be a reasonable proxy for the
cost of energy from the marginal resource.
79/ The DOJ Guidelines support using capacity measures in
industries with homogenous products, such as electricity.
DOJ Guidelines, at 41557. We note that energy measures
(MWH) may also be appropriate.
ally reported by control area.
For smaller entities that are within a control area, the
area s system lambda may be a reasonable proxy for the
cost of energy from the marginal resource.
79/ The DOJ Guidelines support using capacity measures in
industries with homogenous products, such as electricity.
DOJ Guidelines, at 41557. We note that energy measures
(MWH) may also be appropriate.
Docket No. RM96-6-000 - 69 -
may be included in the geographic market. Economic
capacity is that from generating units whose
variable costs are such that they could deliver
energy to a relevant market, after paying all
necessary transmission and ancillary service costs,
at a price close to the competitive price in the
relevant market. For example, if the average
competitive price in the wholesale market is 2.2
cents/kWh during a particular period, all capacity
that can sell into the market at 2.3 cents/kWh (5%
above the competitive price) should be included in
the market. If a seller has no economic capacity,
it should not be considered in the market at this
stage of the analysis. The economic capacity
measure provides a sense of which suppliers own or
control the largest shares of low cost generating
capacity that has a pronounced competitive advantage
over higher cost capacity in the market. 80/
C
Available economic capacity. This measure indicates
how much economic capacity a supplier identified in
the previous step might actually have available to
sell into a market. It includes capacity from
generating units that are not used to serve native
80/ Economic capacity and similar measures were recommended
by the DOJ and FTC. See FTC comments at 10 and DOJ
comments, Appendix at 8.
apacity. This measure indicates
how much economic capacity a supplier identified in
the previous step might actually have available to
sell into a market. It includes capacity from
generating units that are not used to serve native
80/ Economic capacity and similar measures were recommended
by the DOJ and FTC. See FTC comments at 10 and DOJ
comments, Appendix at 8.
Docket No. RM96-6-000 - 70 -
load (or are contractually committed) and whose
variable costs are such that they could deliver
energy to a market at a price close to the
competitive price in the market. The presumption
underlying this measure is that the lowest running
cost units are used to serve native load and other
firm contractual obligations and would not be
available for other sales. As competition develops,
this presumption may not be valid. 81/ Because of
its focus on variable costs, available economic
capacity is useful for evaluating energy (in
contrast to capacity) markets.
C
Uncommitted capacity. This traditional measure is
useful for evaluating intermediate-capacity markets.
For each supplier included in the relevant market,
this measure is computed by subtracting native load
and firm contractual obligations from total
capacity.
C
Total capacity. Total capacity has traditionally
been used by the Commission and others to analyze
markets. While this measure does not account for
native load obligations and does not capture the
availability or cost of generation, and thus is not
81/ For example, in a market with full retail access and a
bid-based power exchange, all generation units would be
in the market.
ity. Total capacity has traditionally
been used by the Commission and others to analyze
markets. While this measure does not account for
native load obligations and does not capture the
availability or cost of generation, and thus is not
81/ For example, in a market with full retail access and a
bid-based power exchange, all generation units would be
in the market.
Docket No. RM96-6-000 - 71 -
useful for a delivered price analysis, it does
provide a sense of the overall size of a supplier
that is included in the relevant market.
b.
Accounting for transmission capability
Once the suppliers that might economically supply the
product to a market or customer are identified, and the
relevant capacity measures are calculated, each supplier s
capacity measures should be adjusted to account for how much
of the product that seller can physically deliver to that
market. The extent of transmission capability determines the
extent of a supplier s ability to physically reach a market.
The flows on a transmission system can be very different
under different supply and demand conditions (e.g. peak vs.
off-peak). Consequently, the amount and price of transmission
available for suppliers to reach wholesale buyers at different
locations throughout the network can vary substantially over
time. If this is the case, the analysis should treat these
narrower periods separately and separate geographic markets
should be defined for each period.
It is important to assess accurately the amount of
transmission capability available for each supplier s use.
The key to incorporating transmission limitations into the
merger analysis is to include each supplier in the relevant
market only to the extent of the transmission capability
available to them. This would be calculated as the
ographic markets
should be defined for each period.
It is important to assess accurately the amount of
transmission capability available for each supplier s use.
The key to incorporating transmission limitations into the
merger analysis is to include each supplier in the relevant
market only to the extent of the transmission capability
available to them. This would be calculated as the
Docket No. RM96-6-000 - 72 -
combination of the available transmission capability (ATC) 82/
and any firm transmission rights held by the supplier that are
not committed to long-term transactions.
In many cases, multiple suppliers could be subject to the
same transmission path limitation to reach the same
destination market and the sum of their economic generation
capacity could exceed the transmission capability available to
them. In these cases, the ATC must be allocated among the
potential suppliers for analytic purposes. There are various
methods for accomplishing this allocation. Applicants should
support the method used.
Applicants should also present evidence regarding how
transmission capability will be affected by the merger.
Transmission line loadings are likely to change as a result of
the merging parties combined operations. These changes are
likely to result in transmission availability that is
different from historical experience. Applicants should
include in their application the following data: hourly TTC
83/ and hourly firm and non-firm ATC, and firm transactions
82/ As used by the industry, ATC is a measure of the transfer
capability remaining in the physical transmission network
for further commercial activity over and above already
committed uses. See for example, NERC, Available
Transfer Capability Definitions and Determination, June
1996 at page 2. In hours when ATC is zero, a
transmission constraint is said to be binding
82/ As used by the industry, ATC is a measure of the transfer
capability remaining in the physical transmission network
for further commercial activity over and above already
committed uses. See for example, NERC, Available
Transfer Capability Definitions and Determination, June
1996 at page 2. In hours when ATC is zero, a
transmission constraint is said to be binding. This
prevents the dispatcher from scheduling any additional
transactions between the two points in the constrained
direction.
83/ As used by the industry, total transmission capability
Docket No. RM96-6-000 - 73 -
between relevant control areas. The ATC and TTC data should
come directly from the OASIS systems once they are
implemented. Until then, applicants should file estimates of
TTC and ATC with data or other background material that will
allow the Commission to verify that the estimates are
reasonable. Given these data, the Commission will be able to
assess independently the amount of generation capacity that
may be available to the market by each supplier.
c. Trade data check.
It would be expected that there be some correlation
between the suppliers included in the market by the delivered
price test and those actually trading in the market. As a
check, actual trade data should be used to compare actual
trade patterns with the results of the delivered price test.
For example, it may be appropriate to include current trading
partners in the relevant market even if the above analysis
indicates otherwise. Alternatively, if there has been little
or no trade between a customer and a specific supplier, it may
be appropriate to exclude that supplier from the market,
unless the applicants can show why it should be included
prospectively
ivered price test.
For example, it may be appropriate to include current trading
partners in the relevant market even if the above analysis
indicates otherwise. Alternatively, if there has been little
or no trade between a customer and a specific supplier, it may
be appropriate to exclude that supplier from the market,
unless the applicants can show why it should be included
prospectively. The lack of open access in the past may have
prevented trade between the entities but trade may be more
(..continued)
(TTC) is the amount of electric power that can be
transferred over the interconnected network in a reliable
manner while meeting all of a specific set of defined
pre- and post-contingency conditions. NERC, id. at page
2.
Docket No. RM96-6-000 - 74 -
likely in an open access environment. Applicants should file
historical trade data showing transactions between potential
suppliers identified in the steps discussed above and the
customers in question. The trade data filed should identify
the supplier, customer, and characteristics of the
transactions (duration, firmness, etc.). Any adjustments to
the suppliers included in the market under the delivered price
test must be fully supported.
4.
Analyze concentration
The final step in the screen analysis is to analyze the
effect of the proposed merger on market concentration and
competition. To do so, concentration statistics should be
calculated using the capacity measures discussed above for
each relevant market identified. In cases where limited
transmission capability during certain time periods results in
a number of time differentiated markets, concentration
statistics should be calculated for each. Both HHIs and
single firm market share statistics should be presented for
both pre- and post-merger conditions
d be
calculated using the capacity measures discussed above for
each relevant market identified. In cases where limited
transmission capability during certain time periods results in
a number of time differentiated markets, concentration
statistics should be calculated for each. Both HHIs and
single firm market share statistics should be presented for
both pre- and post-merger conditions. 84/ In calculating HHIs
84/ Post-merger geographic markets could include more or
fewer suppliers than the pre-merger markets due to the
effect of combining transmission rates. In cases where
the merged company will charge a single system wide
transmission rate, the merger will result in just one
transmission rate where there were two before the merger.
Thus, after the merger, some suppliers that were
excluded from some destination markets could be included
if the elimination of one of the transmission charges
allows them to economically reach the market. While a
stable geographic market would be preferable for analytic
reasons, the effect described here reflects the reality
of current transmission pricing policy and market
Docket No. RM96-6-000 - 75 -
and market shares, the relevant generation capacity of the
customers in each market should be included in the denominator
of the ratio statistics. For example, if the economic
capacity measure is being used, then the customer s economic
capacity should be included. Such capacity would be available
and turned to as a response to a significant price increase by
external suppliers.
The HHI measures should be compared with the thresholds
given in the DOJ Merger Guidelines
ould be included in the denominator
of the ratio statistics. For example, if the economic
capacity measure is being used, then the customer s economic
capacity should be included. Such capacity would be available
and turned to as a response to a significant price increase by
external suppliers.
The HHI measures should be compared with the thresholds
given in the DOJ Merger Guidelines. The Guidelines address
three ranges of market concentration: (1) an unconcentrated
post-merger market--if the post-merger HHI is below 1000, the
merger is unlikely to have adverse competitive effects
regardless of the change in HHI; (2) moderately concentrated
post-merger market--if the post merger HHI ranges from 1000 to
1800 and the change in HHI is greater than 100, the merger
potentially raises significant competitive concerns; and (3)
highly concentrated post-merger market--if the post-merger HHI
exceeds 1800 and the change in the HHI exceeds 50, the merger
potentially raises significant competitive concerns; if the
change in HHI exceeds 100, it is presumed that the merger is
(..continued)
organization. A buyer inside the transmission area of
one of the merging companies could see higher
transmission rates as a result of a single system rate
for the merged company thereby decreasing the competitive
options available to it. We also note that a decrease in
transmission prices paid could result in increased
demand, congestion, and no increase of suppliers in some
markets.
)
organization. A buyer inside the transmission area of
one of the merging companies could see higher
transmission rates as a result of a single system rate
for the merged company thereby decreasing the competitive
options available to it. We also note that a decrease in
transmission prices paid could result in increased
demand, congestion, and no increase of suppliers in some
markets.
Docket No. RM96-6-000 - 76 -
likely to create or enhance market power. 85/
If the Guidelines thresholds are not exceeded, no
further analysis need be provided in the application. We
emphasize, however, that the Guidelines are just that:
guidelines. There will undoubtedly be instances where
concentration statistics may fall just above or just below the
thresholds for concern and some additional analysis or
judgement is needed. 86/ For example, if a proposed merger s
effect on concentration falls just below a threshold, the
Commission might still want to see further analysis if
intervenors have raised significant concerns regarding the
proposed merger. It is reasoned analysis, not blind faith in
the thresholds, that must carry the day.
Instances where high concentration is indicated in
markets that are defined by fairly short-lived periods of low
transmission capability will require additional analysis. The
concern with high concentration in a market is that firms will
be able to raise prices substantially and adversely impact the
market. Relatively short periods of high concentration could
be significant if the concentration is high enough. The
85/ DOJ Guidelines, at 41558 .
86/ The Guidelines state that the HHI statistics provide a
useful framework for merger analysis but they suggest
greater precision than is possible with the available
economic tools and information. Other things being
equal, cases falling just above and just below a
threshold present comparable competitive issues.
Guidelines, at 41558.
85/ DOJ Guidelines, at 41558 .
86/ The Guidelines state that the HHI statistics provide a
useful framework for merger analysis but they suggest
greater precision than is possible with the available
economic tools and information. Other things being
equal, cases falling just above and just below a
threshold present comparable competitive issues.
Guidelines, at 41558.
Docket No. RM96-6-000 - 77 -
factors that affect whether such a situation is problematic
are the degree of concentration, as measured by HHI
statistics, and how long that concentration lasts. High
concentration is an indicator for how easy it would be for
firms to behave strategically (e.g., collude, or if
concentration is high enough, act unilaterally) to raise
prices. It is a proxy measure for the degree to which prices
could be raised. This, together with the length of time the
concentration lasts, gives some idea of the potential severity
of anticompetitive impact.
The Commission has insufficient experience to adopt at
this time specific thresholds for the various possible
combinations of HHI and length of time at which the
constrained periods would be problematic. Applicants and
other parties are strongly encouraged to analyze short-lived
periods of high concentration using the framework discussed
above and to support the conclusions drawn from it. There may
be cases in which the applicant may be able to show that the
anticompetitive effect of constrained transmission
availability is de minimis. While the Commission has
insufficient experience to establish a specific de minimis
test in this policy statement, applicants may argue in a
specific case that the anticompetitive effect of a constraint
is de minimis. We offer the following general guidance to
applicants that seek to make such a showing regarding short-
lived transmission constraints. First, peak periods may be
e minimis. While the Commission has
insufficient experience to establish a specific de minimis
test in this policy statement, applicants may argue in a
specific case that the anticompetitive effect of a constraint
is de minimis. We offer the following general guidance to
applicants that seek to make such a showing regarding short-
lived transmission constraints. First, peak periods may be
Docket No. RM96-6-000 - 78 -
more problematic than other periods, because the opportunity
to exercise market power likely would lead to significantly
higher prices during those hours. Second, some level of
market concentration above the DOJ threshold may be acceptable
if the applicant can show that there are multiple sellers in
the constrained area and/or that there are multiple holders of
capacity into the constrained area. And finally, our concern
with short-lived periods of high concentration is greater if
the merged firm will have market-based pricing authority.
Without such authority, the firm may not be able to
substantially raise prices.
If the DOJ Guideline concentration thresholds are
exceeded, including instances where short-lived periods of
high concentration are indicated to be problematic, then the
application should present further analysis consistent with
steps 2 to 5 in the Guidelines. The additional analysis could
address the potential for adverse competitive effects, the
potential for entry in the market and the role entry could
play in mitigating the increased market power, any efficiency
gains that reasonably could not be achieved by other means,
and whether, but for the merger, either party would likely
fail causing its assets to exit the market.
If entry is considered as a potential mitigating factor,
applicants should address entry barriers, such as the time
needed to install any necessary transmission capacity. All
entry barriers should be addressed, even if they are not
s that reasonably could not be achieved by other means,
and whether, but for the merger, either party would likely
fail causing its assets to exit the market.
If entry is considered as a potential mitigating factor,
applicants should address entry barriers, such as the time
needed to install any necessary transmission capacity. All
entry barriers should be addressed, even if they are not
Docket No. RM96-6-000 - 79 -
controlled by the applicants. Good market structure can be
stymied by entry barriers, regardless of the source, e.g.,
transmission constraints on a neighboring utility s system.
C.
Data
The usefulness of this screen depends on the quality and
comprehensiveness of the data filed with the application. The
data needed for the screen generally are publicly available.
It is important for applicants to file electronically all data
used for the screen analysis, including supporting data, and
the data specified in this policy statement. 87/ The
Commission must be able to check on the applicants' analysis
independently. To do so, the Commission must have ready
access to the data. Otherwise, data requests could result in
delay. If there are problems in obtaining or understanding
the data, the Commission is interested in developing informal
means, such as technical conferences, to gather additional
needed data or resolve questions or misunderstandings
concerning the screen analysis, before the Commission
addresses the merger. This approach could reduce the time
needed to get useable data and perhaps reduce the need to set
a merger for evidentiary hearing.
D.
Other considerations
We note that the above description of the analytic screen
focuses only on monopoly (seller) power. This is not intended
87/ The data that should be electronically filed in an
application is listed in Appendix B.
his approach could reduce the time
needed to get useable data and perhaps reduce the need to set
a merger for evidentiary hearing.
D.
Other considerations
We note that the above description of the analytic screen
focuses only on monopoly (seller) power. This is not intended
87/ The data that should be electronically filed in an
application is listed in Appendix B.
Docket No. RM96-6-000 - 80 -
to exclude monopsony (buyer) power as a relevant
consideration. An analysis of monopsony power should be
developed if appropriate. Long-term purchases and sales data
for interconnected entities are already collected and could be
used to assess buyer concentration in the same way that seller
concentration is calculated. In any event, intervenors may
raise this issue if it is a concern.
The Commission understands that the screen analysis
described in this policy statement will evolve with industry
restructuring and market maturation. For example, as
unbundling occurs, companies may have market power for sales
from individual generating units (e.g., must-run units ). In
addition, markets are developing in response to competition
and are spawning new products and increasingly short term
exchanges. Markets will probably be differentiated by product
(e.g., firm and non-firm energy and reactive power), by time
(e.g., peak, off-peak) or by geography (e.g., markets
separated by transmission constraints). The definition of
relevant geographic and product markets must account for these
new realities. Further, methods for trading and information
availability are changing. As regional institutions, such as
ISOs, and regional markets develop, transmission services may
no longer be a series of transactions based on utility-by-
utility corporate boundaries, but rather single regional
transactions. This will have important implications for
entry, customer response to price changes, and the number of
methods for trading and information
availability are changing. As regional institutions, such as
ISOs, and regional markets develop, transmission services may
no longer be a series of transactions based on utility-by-
utility corporate boundaries, but rather single regional
transactions. This will have important implications for
entry, customer response to price changes, and the number of
Docket No. RM96-6-000 - 81 -
suppliers that have competitive delivered prices.
The means of our analysis may also change. For example,
flow based network models that include constraints on
transmission networks are likely to be needed for the screen
analysis. In the future, the Commission will have to rely
less on methods that use costs to assess markets. Generation
cost data will become increasingly sensitive, market
participants will be less willing to report them, and
accounting costs will be increasingly irrelevant to market
behavior. The Commission will rely more on actual
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