# 77 FERC ¶ 61,263: Policy Statement Establishing Factors the Commission Will Consider in Evaluating Whether A Proposed Merger is Consistent With the Public Interest > Federal · Agency guidance · In force URL: https://www.frixlaw.com/law-library/statutes/FERC_RM96_6_000 ## Section - **Citation:** 77 FERC ¶ 61,263 - **Heading:** Policy Statement Establishing Factors the Commission Will Consider in Evaluating Whether A Proposed Merger is Consistent With the Public Interest - **Jurisdiction:** Federal - **Kind:** Agency guidance - **Status:** In force - **Text as of:** August 14, 2026 - **Source:** Compiled text - **Location:** FERC Policy Statements / Policy Statement Establishing Factors the Commission Will Consider in Evaluating Whether A Proposed Merger is Consistent With the Public Interest ## Text 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 industrys rapid restructuring, and the Commissions 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 industrys rapid restructuring, and the Commissions 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 screens 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 screens 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 buyers 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 buyers 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. R [Text truncated at 120,000 characters. The full text is on the page linked above.] ## Nearby sections - [77 FERC ¶ 61,263 Policy Statement Establishing Factors the Commission Will Consider in Evaluating Whether A Proposed Merger is Consistent With the Public Interest](https://www.frixlaw.com/law-library/statutes/FERC_RM96_6_000.md) - [88 FERC ¶ 61,227 Certification of New Interstate Natural Gas Pipeline Facilities](https://www.frixlaw.com/law-library/statutes/FERC_PL99_3_000.md) - [109 FERC ¶ 61,186 Policy Statement on Credit-Related Issues for Electric OATT Transmission Providers, ISOs & RTOs](https://www.frixlaw.com/law-library/statutes/FERC_PL05_3_000.md) - [112 FERC ¶ 61,040 Order Further Clarifying Policy Statement on Natural Gas and Electric Price Indices](https://www.frixlaw.com/law-library/statutes/FERC_PL03_3_006.md) - [120 FERC ¶ 61,060 Section 203 Supplemental Policy Statement](https://www.frixlaw.com/law-library/statutes/FERC_PL07_1_000.md) - [121 FERC ¶ 61,221 FERC Hydrokinetic Energy Project Policy Statement](https://www.frixlaw.com/law-library/statutes/FERC_PL08_1_000.md) - [123 FERC ¶ 61,048 Composition of Proxy Groups for Determining and Oil Pipeline Return on Equity](https://www.frixlaw.com/law-library/statutes/FERC_PL07_2_000.md) - [123 FERC ¶ 61,156 Revised Policy Statement on Enforcement](https://www.frixlaw.com/law-library/statutes/FERC_PL08_3_000.md) - [125 FERC ¶ 61,058 Compliance with Statutes, Regulations, and Orders](https://www.frixlaw.com/law-library/statutes/FERC_PL09_1_000.md) - [125 FERC ¶ 61,208 Material Changes in Facts that Require Notifications Under Commission Regulations Under the Public Utility Holding Company Act of 2005](https://www.frixlaw.com/law-library/statutes/FERC_PL09_2_000.md) - [128 FERC ¶ 61,060 Smart Grid Policy Statement](https://www.frixlaw.com/law-library/statutes/FERC_PL09_4_000.md) - [129 FERC ¶ 61,248 Policy Statement On Disclosure Of Exculpatory Materials](https://www.frixlaw.com/law-library/statutes/FERC_PL10_1_000.md) - [130 FERC ¶ 61,220 Policy Statement On Penalty Guidelines](https://www.frixlaw.com/law-library/statutes/FERC_PL10_4_000_20100318.md) - [132 FERC ¶ 61,216 Revised Policy Statement On Penalty Guidelines](https://www.frixlaw.com/law-library/statutes/FERC_PL10_4_000.md) --- Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FERC_RM96_6_000. Check the current official text before relying on it. Not legal advice.