BEFORE THE
                   FEDERAL ENERGY REGULATORY COMMISSION
                           DEPARTMENT OF ENERGY
                             WASHINGTON, D.C.


In The Matter of                                    )
                                                    )
Promoting Wholesale Competition Through             )
Open Access Non-discriminatory Transmission         )   Docket Nos. RM95-
Services by Public Utilities, Recovery of           )   8-000 &
Stranded Costs by Public Utilities and              )   RM94-7-001
Transmitting Utilities; Proposed Rulemaking and     )
Supplemental Notice of Proposed Rulemaking          )


                COMMENTS OF THE U.S. DEPARTMENT OF JUSTICE



I.   INTRODUCTION AND SUMMARY
     The Federal Energy Regulatory Commission (FERC or Commission) has
proposed a far-ranging plan to encourage competition in the electric
utility industry through industry restructuring.  The United States
Department of Justice encourages the Commission to pursue
restructuring in the electric utility industry.  Restructuring is a
major step to allowing the FERC to rely on the market rather than
price regulation to set efficient prices for electric power in the
United States.  In this context, the Department makes four general
points.

         Restructuring:  The NOPR presents a regime of open access
          transmission tariffs and functional unbundling of
          transmission and generation sales by vertically integrated
          utilities.  The Department agrees that some mechanism for
          vertical disintegration will maximize the potential for
          competition in the electric generation market.  The
          Department suggests a solution that will produce results
          closer to the more drastic remedy of complete divestiture of
          generation from transmission--"operational unbundling." 
          Operational unbundling would divorce operation and dispatch
          of generating plants from the operation of the transmission
          system in order to assure that transmission market power
          cannot be used to distort the market for generation.

         Assuring competition in generation: The Commission has
          suggested that an open access regime in transmission could
          allow it to decline to monitor prices in wholesale
          generation markets.  The Department suggests strongly that,
          while open access and operational unbundling will encourage
          competition in generation and provide new alternative
          sources of supply for purchases of wholesale power,
          ownership of generating capacity may still be concentrated
          in some regions of the country, enough to warrant
          regulation.  The Department urges the Commission, even after
          restructuring, to examine generation markets rather than
          assume them to be competitive.

         Transmission: After restructuring of the industry,
          transmission will likely require regulation.  It is critical
          that transmission pricing not be allowed to limit the
          potential efficiency potential of the newly competitive
          generation market.  Further, the Department encourages the
          FERC to support the development of a secondary market for
          transmission capacity.
  
         Collection of "stranded" costs:  The Department does not
          take a position on the method of calculation or the
          necessity of allowing recovery of stranded costs.  But the
          Department strongly suggests that any mechanism for recovery
          of stranded costs be designed to minimize distortion of
          competition for generation and urges the FERC to avoid use
          of transmission adders as a means of recovery.  In addition,
          the Department suggests that the recovery structure should
          provide slower economic incentives for utilities to mitigate
          stranded costs.   
  
II.  INDUSTRY RESTRUCTURING:  OPERATIONAL UNBUNDLING

     The electric utility industry in the United States is
characterized by extensive vertical integration, which may create
obstacles to effective competition in the wholesale generation market. 
As the Department pointed out to this Commission in Comments
concerning restructuring of the natural gas industry, vertical
integration of regulated and potentially competitive markets can cause
significant opportunities for regulatory evasion.  Partial
deregulation of a multiproduct firm with monopoly power in one product
may provide the opportunity and incentive for discrimination.
     The NOPR suggests that the Commission is concerned with
discrimination.  Through discrimination, the monopolist creates terms
and conditions for the purchase of its regulated service (here,
transmission) that may lessen competition for its unregulated or
potentially competitive service (here, wholesale power).  Such
discrimination, if successful, allows the firm to charge a
supercompetitive price for the bundle of services that includes both
the potentially competitive electric power and the strictly regulated
transmission service.  Discrimination in the electric industry could
take the form of denying competitive operators access to the
transmission monopolist's services on terms comparable to the terms
the monopolist allows its own generation or denying access outright. 
In this way, the monopolist can accomplish what the regulation of the
monopoly service was designed to avoid--supracompetitive profits.  
     Regulators have several options for dealing with regulatory
evasion via discrimination.  One option is to force the regulated firm
essentially to purchase regulated services from itself on terms and
conditions comparable to those available to its competitors.  This is
the option proposed in the NOPR.  Such a requirement allows increased
competition for some unbundled services, but requires the Commission
to closely monitor and police comparable access requirements, an
extraordinarily difficult task.  
     A second option is to allow the regulated firm to offer bundled
service, but to regulate the price of the bundled product.  This
approach preserves any economies of scope inherent in the vertical
integration, but does not achieve the potential gains from allowing
one of the services to have its prices and terms set in a competitive
market.  
     A third option is divestiture.  This option achieves the gains
from allowing a competitive wholesale generation market to develop at
minimal regulatory cost, but may sacrifice some economies of vertical
integration that the other options do not.  Divestiture is preferable
unless the benefits of preserving economies of scale through
unbundling exceed the regulatory costs of effective monitoring of
comparable access.
     The electric utility industry presents extremely difficult
problems of access regulation.  Monitoring and enforcing compliance
with regulations against discrimination is particularly difficult when
quality of service is as time sensitive as it is in electric power. 
Because power is sold on an hourly basis, market dynamics -- and thus
the incentive and ability to exploit market power -- can shift over
the course of each day, making it virtually impossible to intervene
before conditions have changed.  Containing utilities' anticompetitive
behavior at one time and in one part of the system may provide little
assurance of containing distortions to the market later or elsewhere. 
Ensuring that the services and prices the integrated utility charges
its competitors are equivalent to what it charges itself, could
require virtually transaction by transaction regulatory oversight.  
     A structural solution, complete divestiture, would resolve the
competition problem better than this costly, intrusive regulation and
ultimately interruption of behavior.  Complete separation of both
ownership and control, by establishing or restoring competitors'
independence, can provide the best assurance against anticompetitive
incentive and capability.     For this reason, in antitrust enforcement,
divestiture is the remedy commonly sought for anticompetitive mergers
or monopolization.  The only compliance oversight required for such
divestiture is ensuring that the divested assets will be operated as a
viable ongoing business and that divestiture takes place.  By
contrast, continued monitoring is required to assure compliance with
behavioral or intra-firm structural orders.  Ordering a firm to afford
access is futile if the costs of monitoring its compliance are too
high.  
       Achieving complete corporate divestiture may be costly,
especially where assets and operations are thoroughly integrated.  The
industry is already substantially vertically integrated.  The solution
cannot be simply to prevent inappropriate vertical integration. 
Instead, FERC-ordered divestiture could entail potentially great cost
as it would require dismembering almost all existing corporate
relationships in a vital industry.  Divestiture may however be
possible to implement on a regional basis and could well be
appropriate as a remedy to specific competitive problems.
     Because functional unbundling, as proposed by the Commission, may
not be effective, and divestiture may be difficult and costly to
implement industry-wide, the Department suggests that the Commission
consider an approach of "operational unbundling."  By operational
unbundling, we mean structural institutional arrangements short of
divestiture that would separate the operation of the transmission grid
and access to it from economic interests in generation.  The purpose
would be to prevent the regulated transmission monopolist from using
its market power in transmission to restrict competition in the 
wholesale generation market.  Institutional arrangements to counter
the transmission firm's ability to distort competition in generation
might include a separate authority to manage and plan the transmission
grid and access to it, joint ventures (if competitive conditions
warrant), and voluntary pooling arrangements.
     Separating ownership of generating facilities from control of
transmission would reduce the incentives and ability of a utility to
exercise transmission market power for the purpose of evading
regulation and distorting competition in the generation market.  By
separating ownership from control, operational unbundling captures a
primary advantage of divestiture by assuring that nondiscriminatory
practices and rates will prevail.  Operational unbundling would do
this without costly enforcement of behavioral rules:  Because
generating firms would lose their ability to discriminate, operational
unbundling would rely less on monitoring and thus save the cost of
enforcing behavioral rules.    

III.  AFTER RESTRUCTURING: COMPETITIVE GENERATION AND EFFICIENT
TRANSMISSION PRICING                                    

     Restructuring of the industry, whether through functional
unbundling as the Commission has proposed, operational unbundling as
the Department has proposed, or divestiture, as might be the most
efficient where practical, is a vital step but not the only step
necessary to achieve a competitive generation market.  After
separating generation from transmission, the Commission must examine
competition in the generation market in order to assure efficient
pricing of generation, and must create appropriate transmission rates
in the transmission market in order to assure efficient transmission
pricing.  If the unbundled components, generation and transmission,
are not each priced efficiently, restructuring will not achieve the
potential available for consumers of electric power in the United
States.

     A.  GENERATION MARKETS MUST BE COMPETITIVE.

     The Commission has asked whether, after imposition of an equal
access requirement, price regulation of generation can be relaxed or
eliminated, even in the case of "generator dominance."  The answer is
no.  Vertical disintegration of the electric utility industry, if
effective, could remove the ability to manipulate the generation
market by holders of transmission assets.  This will create the
potential for a competitive generation market.  However, opening
markets to entry does not necessarily produce competition if
generation assets are concentrated in the hands of only a few owners. 
Although opening transmission access to a broader range of generators
may lead to sufficient competition in some markets, the FERC should
still examine actual market concentration and competitive conditions
in determining whether to loosen regulation of generation prices in
any region of the country.
     Antitrust analysis looks at concentration in a defined product
and geographic area.  If concentration of ownership of production is
high, both coordinated interaction (collusion) and unilateral market
power will be more likely, unless factors such as easy entry,
ameliorate the effects of concentration.  Entry must be rapid enough
and effective enough to limit the ability of a dominant firm or
collusive group to exercise market power.
     Introducing open access would not necessarily prevent a dominant
utility of group of utilities from exercising market power.  Open
access is likely to broaden the relevant geographic market for
generation by alleviating some impediments to wholesale wheeling. 
Broadening geographic markets typically results in lowering
concentration and thus reducing the risk of exercise of market power. 
In determining which firms are in the market, the Commission should
look, not only at the legal obligations of utilities such as open
access tariffs, but also physical capability for delivery of power
into the affected region.  Factors such as loading of lines and/or
capacity available at interconnection points, may practically limit
access regardless of legal obligations to provide equal access to all. 
     For this reason, the FERC must examine generation markets before
allowing market-based pricing.  It is essential for the Commission to
recognize an equal obligation to allow the market to set prices where
sufficient competitive conditions prevail.  Only then will consumers
fully share in the benefits of a more efficient electric utility
industry.

     B.  Transmission Pricing Must Be Efficient.

     The Commission should continue to evaluate its transmission
pricing policy even after restructuring.  With increased reliance on
market forces to allocate generation resources, the price and
availability of transmission capacity will have substantial effect on
whether the most efficient generation resources are the ones sold.  It
is essential for the FERC to consider whether transmission price
signals provide proper incentives for investing in major new
transmission projects and eliminating bottlenecks in the transmission
system.
          1.  Secondary Market for Transmission. 
     The Commission has specifically requested comments on the
potential for use of a secondary market in transmission rights.  The
Department agrees with the FERC s interest in allowing a secondary
market for transmission rights.  Trading such capacity rights can be
an economically efficient solution to a common-property resource
problem, and allocate rights of use to those who value them most
highly.  The secondary market is particularly important in bottleneck
areas, where switching from low to high value uses of capacity is
likely to produce the greatest benefits.  For this reason, the
Department has argued in favor of the Commission s efforts to develop
a true secondary capacity market for natural gas pipeline capacity.
     The price signals in the secondary market can provide valuable
information for investment decisions, encouraging expansion of
transmission capacity where new investment will be most productive.
     The secondary market may be very important at bottleneck points
in the system.  Prices must be allowed to rise where there is scarce
capacity in order to encourage capacity expansion, but a monopolist or
coordinated group of transmission owners might exercise market power
to elevate prices even above scarcity rents.  By increasing the number
of transmission sellers, a secondary market could provide alternative
sources and thus help avoid such an exercise of market power.  

          2.  Exceptions From Expansion Order.
     Efficient expansion of the transmission system will be important
to development of the nascent electric generation market, yet the FERC
proposes to permit waivers of its expansion orders.  A utility could
be exempted from a FERC order to expand if the utility showed that it
tried in good faith to comply with the FERC's expansion order, but
that compliance has been blocked by an inability to obtain regulatory
approvals or assemble necessary rights-of-way.  The FERC should be
particularly careful in examining waiver requests and recognize that
local interests may not coincide with national ones.  
     Although market power usually harms a monopoly firm's customers,
the customers that remain captive to a utility after other customers
have left the system may instead gain from the utility s exercise of
market power.  The utility might use its market power over
transmission-only customers in order to collect some of the utility's
stranded costs rather than collecting it from the remaining
electricity customers.  The utility, its remaining customers, and even
its local regulatory authority, could thus share an incentive to favor
the exercise of transmission market power in order to recover
otherwise stranded costs.
     A utility might also attempt to take advantage of market power by
delaying transmission expansion at critical bottlenecks.  A utility
might decide not to expand transmission capacity that would be
necessary for use by customers to reach competing generation sources. 
Further, local authorities might independently refuse to authorize
such transmission expansion.
     Determining whether the utility's effort to obtain regulatory
approval has been in good faith will be difficult.  Furthermore,
refusals to approve siting of new transmission projects by local
regulatory authorities could hamper competitive open access. 
Widespread use of waivers could undermine the transition to open-
access competition.  Congestion on transmission networks will limit
customers' access to alternative power supplies regardless of access
rules.  Operational unbundling would avoid some of these problems.  By
separating ownership of generation from control of transmission
operational unbundling can prevent the transmitting utility from
favoring its own generation.  For this reason, an owner of a
potentially stranded generation plant will find it more difficult to
use its transmission system to favor that plant over more economic
resources owned by others.  Operational unbundling also limits the
local regulator's ability to favor collection of potentially stranded
generation costs by denying utilities the permits necessary to expand
transmission capacity.


III.  METHODS OF STRANDED COSTS RECOVERY SHOULD NEITHER DISTORT
       EFFICIENT PRICING NOR DISCOURAGE MITIGATION.

     FERC believes that after restructuring, increased competition
will cause some historic costs of generation to become "stranded." 
FERC defines these "stranded" costs as legitimate and verifiable
historical costs on which suppliers "could not earn a reasonable
return in a competitive market."  FERC proposes that FERC
jurisdictional stranded costs be recovered from customers, rather than
be borne by utility investors.  Wholesale customers that choose to buy
power from a new supplier would be required to pay their former
supplier a surcharge on transmission services.  The surcharge would be
designed to recover the departing customer's share of its former
supplier's stranded generation costs.  Before a utility would be
allowed to include a stranded-cost charge in its transmission tariff,
it would be required to demonstrate that it has attempted to mitigate
losses caused by the customer s departure.  
     The Department makes no overall assessment of costs and benefits
of recovery of stranded costs.  Collection of stranded costs presents
a difficult policy decision.  Although allowing recovery of stranded
costs might encourage transmission-owning utilities to enter an open-
access regime more quickly, it could also reduce the customers'
incentives to switch to suppliers with the lowest prices, slowing the
transition to competition.  

     A.   Efficiency Gains from Restructuring May Not be Realized if
          Stranded Costs Recovery Distorts Price.

     Different methods of stranded-cost recovery can have
significantly different economic effects.  FERC s goal should be to
choose a method for stranded-cost recovery that would not distort the
price signals that are critical for efficient decisions about
production, consumption, and investment.  The ideal stranded cost-
recovery method would have a neutral effect on the departing
customers  marginal price and output decisions.

     The FERC proposes to recover stranded costs through an additional
charge on transmission services for customers no longer purchasing
electricity.  This charge, based upon future transmission use is
analogous to an excise tax.  Its effects can be contrasted with the
effects of a lump sum tax, which would be based upon past use of
electricity.  The excise approach would distort pricing signals and
customer decisions on the use of electric power.  The lump sum
approach would not.
     The excise approach effectively increases the unit price of a
customer's future services, likely leading the customer to reduce its
future of electricity purchases and to accept substitutes (that is,
other sources of generation) that are more costly.  The cumulative
effect could be to reduce the number of competitive generating
suppliers serving the market.  By contrast, under the lump sum
approach, the departing customer's stranded-cost liability would be
fixed, and the charge would not depend upon how much transmission
service it used in the future.  The lump sum approach, unlike the
excise charge approach, would establish a fixed, sunk liability that
would not distort the customer's economic incentives at the margin.  
     The FERC maintains that the magnitude of FERC-jurisdictional
stranded costs, that is stranded costs at the wholesale level, is
relatively small, so inefficiencies from its choice of stranded-costs
recovery program should be relatively small.  However, the FERC's
choice of method may have wider effects.  FERC's recommendations for
stranded-cost recovery may become a model for states to apply at the
retail level.  For this reason, the FERC should consider the
implications of adopting cost recovery approach carefully.  

     B.   Mitigation Savings Provisions May Limit Utilities'
          Incentives to Use Otherwise Stranded Capacity.

     The FERC proposal recognizes that utilities may have the ability
to mitigate stranded costs that would otherwise be recovered from
their ratepayers.  Under the FERC proposal, it appears that all of a
utility's savings from efforts to mitigate its stranded costs would be
applied to reducing the customers' stranded costs liability. 
Requiring the passthrough of all savings to customers, however, will
undercut the utilities' incentives to mitigate their stranded costs
through innovative services, marketing, and pricing.  If utilities
refrain from such innovation, use of new purchasing opportunities
could be curtailed and secondary markets for transmission could be
delayed.  The result will be a higher level of stranded costs paid by
the utilities customers.  In addition, if the amount of a utility's
stranded costs or mitigation obligation remains unsettled over time,
there will be pressure for incumbents to use a regulatory adjustment
to respond to inroads that would otherwise be countered by competing.
     
     Other treatments of mitigation savings would not discourage
innovation product and service innovation to the same degree.  For
instance, the utility might be required to pass through only some
fraction of mitigation savings to departing customers.  Some states
have adopted a similar approach in their rate of return regulations. 
While incentives to mitigate would be greater under this approach than
under a full pass through, they would still be lower than in a
competitive market.  
     None of the alternative approaches to mitigation is perfect.  
Coordination among the FERC and state regulators on the methods chosen
may reduce confusion, complexity, and litigation delays, assuring a
quicker transition to a competitive environment.  

VI.  Conclusion.

     There are potential tradeoffs among different approaches to
restructuring the electric industry to promote wholesale competition
in generation and enable increased reliance on market forces to set
prices.  The operational unbundling approach, separating control of
access to the transmission grid from ownership or operation of
generation, could be more effective than functional unbundling and
less costly to implement than full divestiture.  
     After restructuring, the FERC is likely to need to continue to
monitor certain generation markets until the competition has been
achieved.  Similarly, it must continue to monitor and encourage
efficient transmission pricing if the benefits of wholesale
competition are to be obtained.  
     The Department takes no position on the net costs or benefits of
recovering stranded costs from future, present, or past customers. 
However, the Department recognizes that if the FERC adopts such a
program, the form it takes will be important, in part because other
jurisdictions will look to it as a model.  Structuring stranded-cost
recovery as excise charges is likely to distort price signals;
instead, the Commission should choose a method that would minimize
price distortions.  Finally, requiring utilities to pass through all
savings from mitigation to customers is likely to undermine utility s
incentives to minimize those costs through innovation.  

                              Respectfully submitted,


                              ___________________
                              Anne K. Bingaman
                              Assistant Attorney General


                              ___________________
                              David Turetsky
                              Special Counsel to the
                                Assistant Attorney General
                                                          

                              Donna N. Kooperstein
                              Assistant Chief
                              Transportation, Energy, and
                                Agriculture Section


                              ___________________
                              Jade Alice Eaton
                              Attorney
                              Transportation, Energy, and
                                Agriculture Section

                              Antitrust Division
                              U.S. Department of Justice
                              Room 9104 Judiciary Center Building
                              555 Fourth Street, NW
                              Washington, D.C.  20001
                              202-307-6349


August 7, 1995