This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

20340

Vol. 63, No. 79

Friday, April 24, 1998

1 16 U.S.C. 824b.

2When the Commission refers to a ‘‘merger’’ in

this document, it also includes ‘‘consolidations.’’

Section 203 of the FPA requires Commission

authorization for mergers or consolidations

involving the jurisdictional facilities of a public

utility. It also requires Commission authorization

for the sale, lease or other disposition of jurisdiction

facilities with a value in excess of $50,000, and for

the purchase by a public utility of the securities of

another public utility.

3 Inquiry Concerning the Commission’s Merger

Policy Under the Federal Power Act: Policy

Statement, Order No. 592, FERC Stats. & Regs.

¶ 31,044 (1996), order on reconsideration, 78 FERC

¶ 61,321 (1997) (Policy Statement).

DEPARTMENT OF ENERGY

Federal Energy Regulatory

Commission

18 CFR Part 33

[Docket No. RM98–4–000]

Revised Filing Requirements (April 16,

1998)

AGENCY: Federal Energy Regulatory

Commission.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Federal Energy

Regulatory Commission (Commission) is

proposing to revise 18 CFR part 33 to

update the filing requirements for

applications under part 33, including

public utility mergers. The Commission

expects that, by providing applicants

more detailed guidance for preparing

applications, the proposed filing

requirements will assist the Commission

in determining whether applications

under section 203 of the Federal Power

Act are consistent with the public

interest and will provide more certainty

and expedition in the Commission’s

handling of such applications.

DATES: Interested entities may file

comments no later than August 24,

1998.

ADDRESSES: File comments with the

Office of the Secretary, Federal Energy

Regulatory Commission, 888 First

Street, NE., Washington, D.C. 20426.

FOR FURTHER INFORMATION CONTACT:

Kimberly D. Bose (Legal Matters) Office

of the General Counsel, Federal

Energy Regulatory Commission, 888

First Street, N.E., Washington, D.C.

20426, Telephone: (202) 208–2284

Wilbur Earley (Technical Matters) Office

of Economic Policy, Federal Energy

Regulatory Commission, 888 First

Street, N.E., Washington, D.C. 20426,

Telephone: (202) 208–0023

Michael A. Coleman (Technical Matters)

Office of Electric Power Regulation,

Federal Energy Regulatory

Commission, 888 First Street, N.E.,

Washington, D.C. 20426, Telephone:

(202) 208–1236

SUPPLEMENTARY INFORMATION: In

addition to publishing the full text of

this document in the Federal Register,

the Commission also provides all

interested persons an opportunity to

inspect or copy the contents of this

document during normal business hours

in the Commission’s Public Reference

Room, Room 2A, 888 First Street, N.E.,

Washington, D.C. 20426. The complete

text on diskette in WordPerfect format

may be purchased from the

Commission’s copy contractor, La Dorn

Systems Corporation. La Dorn Systems

Corporation is located in the Public

Reference Room at 888 First Street, N.E.,

Washington, D.C. 20426.

The Commission Issuance Posting

System (CIPS), an electronic bulletin

board service, also provides access to

the texts of formal documents issued by

the Commission. CIPS is available at no

charge to the user. CIPS can be accessed

over the Internet by pointing your

browser to the URL address: http://

www.ferc.fed.us. Select the link to CIPS.

CIPS also may be accessed using a

personal computer with a modem by

dialing (202) 208–1397 if dialing locally

or 1–800–856–3920 if dialing long

distance. To access CIPS, set your

communications software to 19200,

14400, 12000, 9600, 7200, 4800, 2400 or

1200 bps, full duplex, no parity, 8 data

bits, and 1 stop bit. The full text of this

document will be available on CIPS in

ASCII and WordPerfect 6.1 format. CIPS

user assistance is available at (202) 208–

2474.

I. Overview

In this notice of proposed rulemaking

(NOPR), the Federal Energy Regulatory

Commission (Commission) is proposing

to revise 18 CFR Part 33 by specifying

clear and succinct filing requirements

for applications submitted pursuant to

§ 203 of the Federal Power Act (FPA),1

including public utility mergers.2

Following issuance of the Merger Policy

Statement in 1996,3 § 203 applications

have varied widely in the quantity and

quality of information they have

included, particularly with respect to

competitive market power analyses and

the supporting data. The proposed filing

requirements address this problem by

providing detailed guidance to

applicants. This rulemaking proceeding

is intended to provide greater certainty

as to what is needed in § 203

applications, thereby helping applicants

to organize and prepare their

applications more quickly and

efficiently and also to better predict the

outcome of the Commission’s evaluation

of their applications. In providing more

certainty, the filing requirements are

also intended to facilitate a prompt,

procedurally efficient and substantively

accurate decision making process by the

Commission to ensure that mergers and

other jurisdictional transactions under

§ 203 are consistent with the public

interest in rapidly changing electric

power markets. In addition, the NOPR is

intended to lessen regulatory burdens

on the industry by eliminating outdated

and unnecessary filing requirements,

streamlining the filing requirements for

mergers that do not raise competitive

concerns, and proposing the use of a

computer simulation model to facilitate

a prompt and highly accurate method of

market power analysis by both

applicants and the Commission. The

Commission expects that, by assisting

the Commission and applicants in

determining whether applications under

§ 203 are consistent with the public

interest and providing more certainty

and expedition in applicants’

preparation and the Commission’s

handling of such applications, the

proposed filing requirements can lessen

overall the regulatory burden associated

with the § 203 application process.

The Policy Statement set forth

procedures, criteria and policies for

evaluating proposed mergers. The

Policy Statement set out the three

factors the Commission will consider

when analyzing a merger proposal:

effect on competition; effect on rates;

and effect on regulation. The

Commission also stated its intention to

issue a NOPR to set out specific filing
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20341

4Policy Statement at 30,111 n.3.

5See, Enova Corporation and Pacific Enterprises,

79 FERC ¶ 61,372 (1997) (Enova).

6Policy Statement at 30,128.

7PG&E Corporation and Valero Energy

Corporation, 80 FERC ¶ 61,041 (1997) (PG&E/

Valero); and Enron Corporation, 78 FERC ¶ 61,179

(1997) (Enron). 8 16 U.S.C. 824b.

9U.S. Department of Justice and Federal Trade

Commission, Horizontal Merger Guidelines, 57 FR

41,552 (1992), revised, 4 Trade Reg. Rep. (CCH) ¶

13,104 (April 8, 1997).

10Policy Statement at 30,118.

11The Policy Statement addresses three ranges of

market concentration: (1) an unconcentrated postmerger 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.

requirements consistent with the Policy

Statement.4 That is the primary purpose

of the NOPR we are issuing today.

In the period since the issuance of the

Policy Statement, the Commission has

gained valuable experience evaluating

various types of mergers using the

guidelines in the Policy Statement as

the framework for our analysis. We have

acted on 15 significant merger

applications since the Policy Statement

was issued. Some of these were mergers

of adjacent vertically-integrated electric

companies. Others involved utilities

that were not currently interconnected,

but planned to integrate their electric

systems post-merger. Yet others

involved mergers of electric companies

with natural gas companies. The

Commission has devoted substantial

resources to considering whether a

proposed merger would significantly

increase horizontal or vertical market

power, thereby indicating potential

competitive concerns. As we have

gained experience in reviewing the

issues related to competition presented

by these mergers, we have fine-tuned

the horizontal market power analysis set

out in the Policy Statement and have

adopted a vertical market power

analysis.5 From this experience, we

propose filing requirements that will

enable all parties to more efficiently

address the types of issues that have

arisen in the applications filed since the

issuance of the Policy Statement, as well

as issues that will undoubtedly arise as

the industry continues to make the

transition to a more competitive

marketplace.

Specifically, the NOPR addresses five

areas of merger policy and the

processing of applications: (1) it

reaffirms the Commission’s horizontal

market power analysis and proposes

specific filing requirements for

horizontal mergers consistent with the

Policy Statement’s Appendix A

analysis; 6 (2) it proposes a vertical

market power analysis and

accompanying filing requirements for

mergers that raise vertical market power

concerns that are consistent with our

existing approach to examining vertical

mergers; 7 (3) it proposes streamlined

filing requirements and lesser

information burden for mergers that

raise no competitive concerns; (4) it sets

out a specific computer simulation

model for debate and discussion, and

asks for industry comment on this

particular model and on the use of

modeling in general; and (5) it proposes

to eliminate certain filing requirements

in Part 33 that are outdated or no longer

useful to the Commission in analyzing

mergers. In the course of addressing

these five areas, the NOPR proposes to

reorganize Part 33 so that users of the

regulations can quickly find those

specific requirements that apply to the

merger in which they are interested.

II. Background

Part 33 of the Commission’s

regulations specifies the filing

requirements for applications under

§ 203 of the FPA.8 Pursuant to § 203,

Commission authorization is required

for public utility mergers and

consolidations and for public utilities’

acquisition or disposition of

jurisdictional facilities. Section 203(a) of

the FPA provides, in pertinent part,

that:

No public utility shall sell, lease or

otherwise dispose of the whole of its

facilities subject to the jurisdiction of the

Commission, or any part thereof of a value

in excess of $50,000, or by any means

whatsoever, directly or indirectly, merge or

consolidate such facilities or any part thereof

with those of any other person, or purchase,

acquire, or take any security of any other

public utility, without first having secured an

order of the Commission authorizing it to do

so.

Section 203 provides that the

Commission shall approve such

transactions if they are consistent with

the public interest. The Commission’s

Part 33 filing requirements specify the

information that is necessary for the

Commission to determine whether a

proposed transaction involving the

disposition of jurisdictional facilities by

a public utility satisfies this statutory

criterion.

As a general matter, Part 33 requires

a description of the corporate attributes

of the party or parties to the proposed

transaction (a purchase, sale, lease, or

other disposition, merger, or

consolidation of jurisdictional facilities,

or purchase or other acquisition of the

securities of a public utility) and the

facilities or other property involved in

the transaction. Additional information

required includes the applicants’

proposed accounting treatment of the

transaction, statements as to the effect of

the transaction on current energy

contracts, and the applicants’ showing

that the transaction will be consistent

with the public interest.

As noted previously, one of the

factors the Commission considers when

analyzing whether a merger proposal is

consistent with the public interest is the

effect on competition. The Policy

Statement adopts the Department of

Justice (DOJ)/Federal Trade Commission

(FTC) 1992 Horizontal Merger

Guidelines (Guidelines) 9 as the

analytical framework for examining

horizontal market power concerns. The

Guidelines set forth a five-step merger

analysis: (1) define markets likely to be

affected by the merger and measure the

concentration and the increase in

concentration in those markets; (2)

assess whether the merger, in light of

market concentration and other factors

that characterize the market, raises

concern about potential adverse

competitive effects; (3) assess whether

entry could mitigate the adverse effects

of the merger; (4) assess whether the

merger results in efficiency gains not

achievable by other means; and (5)

assess whether, absent the merger,

either party to the merger would likely

fail, causing its assets to exit the

market.10

The Policy Statement also describes

an analytical screen that is intended to

allow early identification of mergers

that do not raise competitive concerns.

The Commission believes the screen

produces a reliable, conservative

analysis of the competitive effects of

proposed mergers. As part of the screen

analysis, the Policy Statement requires

generally that the applicants define

product and geographic markets that are

likely to be affected by the proposed

merger and measure the concentration

in those markets. The Policy Statement

suggests a way of defining geographic

markets based on identifying feasible

alternative suppliers to the merged

firm—the delivered price test. The

concentration of potential suppliers

included in the market is then measured

by the Herfindahl-Hirschman Index

(HHI) and used as an indicator of the

potential for market power.11 We

describe the Policy Statement’s
20342 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

12Although we are proposing to eliminate this

section of our Part 33 regulations, the Commission

intends to continue to process § 203 applications as

expeditiously as practicable. As stated in the Policy

Statement, the Commission continues to believe

that, for most mergers, we can issue an initial order

within 150 days of a completed application.

13 In this preamble, we will not note the sections

that do not have proposed revisions. However,

these sections are set forth in the attached

regulatory text.

14Policy Statement at 30,125–26 (we no longer

consider the reasonableness of purchase price as a

factor and consider it subsumed by the effect on

rates factor).

approach to analyzing the effect on

competition in more detail below.

The Policy Statement states that the

Commission will examine the second

factor, the effect on rates, by focusing on

ratepayer protections designed to

insulate consumers from any harm

resulting from the merger. We directed

merger applicants to attempt to

negotiate such measures with their

customers before filing merger

applications.

Finally, the Policy Statement sets

forth a third factor for examination, the

effect on regulation, as it relates both to

state regulation and to the potential shift

in regulation from the Commission to

the Securities and Exchange

Commission (SEC), the latter as the

result of a merger creating a registered

public utility holding company. With

respect to a merger’s effect on state

regulation, we stated in the Policy

Statement that where the state

commissions have authority to act on

the merger, the Commission intends to

rely on them to exercise their authority

to protect state interests. With respect to

shifts of regulatory authority from this

Commission to the SEC, the Policy

Statement explains that, unless

applicants commit themselves to abide

by this Commission’s policies with

regard to affiliate transactions, we will

set the issue for hearing.

Below, we propose filing

requirements that are consistent with

the Policy Statement. We also propose

ways to update and streamline our

current filing requirements that will

help to expedite and better focus

applications and our review processes.

III. Discussion

A. General

As stated earlier, the Commission is

examining its filing requirements for

transactions requiring our authorization

under § 203 of the FPA in light of the

fundamental changes occurring in the

electric utility industry and the

regulation of the industry. First, the

Commission believes that a portion of

the information that has historically

been required for all § 203 applications

is no longer needed for those

applications that involve routine

dispositions of jurisdictional facilities,

and, accordingly, we propose to

eliminate certain filing requirements.

Second, because of the proliferation of

utility mergers and the growing

importance of analyzing the competitive

effects of such mergers on emerging

competitive markets, the Commission

believes that more descriptive filing

requirements are needed. Finally, we

propose to reorganize and clarify certain

of our regulations under Part 33 in order

to enhance the usefulness of those

regulations. The goal of each of these

measures is to streamline and clarify our

filing requirements, make our

processing of § 203 applications more

efficient and timely, and provide greater

certainty to the industry regarding the

Commission’s probable action on

applications.

B. Proposed Revisions to Part 33—Basic

Information Requirements

Part 33 currently contains twelve

basic information requirements

(§ 33.2(a) through (l)) and nine exhibits

(§ 33.3 Exhibits A through I) that an

applicant must file. Some of these

requirements overlap. For example,

§§ 33.2(I) and 33.3 Exhibit G both

concern applications filed with state

commissions and can be consolidated.

Other information requirements are no

longer relevant to our review of

applications filed under this part. An

example is § 33.3 Exhibit A, which

concerns resolutions by applicants’

directors authorizing the transaction for

which Commission approval is

requested. We do not believe we need

this information in order to determine

whether a transaction is consistent with

the public interest. Also, a number of

public utilities are exempt from the

record-keeping requirements of the

Commission’s Uniform System of

Accounts at the current §§ 33.2(g) and

33.3 Exhibits C, D, E and F, which relate

to financial statements and account

balances. Accordingly, we are proposing

to streamline our Part 33 regulations to

eliminate these unnecessary or

inapplicable information requirements,

combine sections that request

duplicative information and direct our

accounting requirements only to those

applicants subject to the Commission’s

Uniform System of Accounts.

We are further proposing to eliminate

entirely the current § 33.10. The 45 day

time limit set forth in that section for

Commission action, which is not a

requirement under the statute, is no

longer feasible in light of the increasing

complexity of § 203 applications being

filed, especially merger and other

industry restructuring transactions.12 In

addition, proposed § 33.6 incorporates

the requirement of the current § 33.2(l)

to file a form of notice and would

require submission of the notice in

electronic format. In addition to these

modifications, discussed below are

other proposed basic information

requirements under Part 33 that reflect

our current way of analyzing § 203

applications.13

Proposed § 33.1—applicability—

revises the current § 33.1 to state

succinctly that the requirements of Part

33 apply to public utilities seeking

authority for any transaction requiring

Commission authorization under § 203.

No change is proposed in § 33.2(b)—

authorized representative—except that

the phone and fax numbers of the

person authorized to receive

communications regarding the

application, which are already

voluntarily provided by nearly all

applicants, would be required. This

subsection also proposes that E-mail

addresses be provided.

Proposed § 33.2(c)—description of the

applicant—incorporates the

requirements of current § 33.2(c) and (k)

and Exhibit B and requires a description

of the applicant’s business activities,

corporate affiliations, common officers

with other parties to the transaction,

and jurisdictional customers.

Organizational charts are not

specifically required under our current

regulations; the narrative descriptions

currently required to be filed generally

are more clearly depicted in chart form.

As a result, we propose that

organizational charts be filed.

Proposed § 33.2(d)—description of the

jurisdictional facilities—requires a

general description of the applicant’s

jurisdictional facilities.

Proposed § 33.2(e)—description of the

proposed transaction—incorporates the

requirements of current § 33.2(d), (e), (f)

and (h) requiring a description of the

proposed transaction for which

Commission authorization is sought,

including all parties to the transaction,

the jurisdictional facilities involved or

affected by the transaction, the

consideration for the transaction,14 and

the effect of the transaction on the

applicant’s jurisdictional facilities.

Proposed § 33.2(f)—contracts related

to the proposed transaction—

incorporates the requirements of current

Exhibit H. No other change is proposed.

Proposed § 33.2(g)—the applicant’s

public interest statement—includes the

requirements for applicants to address

the factors that the Commission

considers in determining whether a
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20343

15Policy Statement at 30,113. See also, Duke

Power Company and PanEnergy Corporation, 79

FERC ¶ 61,236 (1997) (Duke); Noram Energy

Services, Inc., 80 FERC ¶ 61,120 at 61,379 and n.13

(1997)(NORAM); Morgan Stanley Capital Group

Inc., et al., 79 FERC ¶ 61,109 at 61,503–04

(1997)(Morgan Stanley); and Boston Edison

Company and BEC Energy, 80 FERC ¶ 61,274

(1997).

16We noted in Enova that a merger of

jurisdictional facilities can be effected by a change

in control over a public utility’s facilities. Public

utilities (or their parent companies) can effect a

merger by combining their businesses through the

formation of a new holding company that will own

or control, either directly or indirectly, previously

unaffiliated entities. See Enova, 79 FERC ¿ 61,107

at 61,491–96 (1997).

17 In the Policy Statement, we stated that we

would request public comment in this rulemaking

on merger processing procedures and how they can

be better tailored to meet the specific needs of

participants in merger proceedings. Policy

Statement at 30,125.

18See § 33.3(b)(2) of the proposed regulations.

19The specific filing requirements are set forth in

§ 33.3(b)(1) of the proposed regulations.

transaction is consistent with the public

interest, as set forth in the Policy

Statement.

Proposed § 33.2(h)—maps—

incorporates the requirements of current

Exhibit I and would be applicable only

if the proposed transaction involves a

disposition of physical facilities.

Proposed § 33.2(I)—other regulatory

approvals—incorporates the

requirements of current § 33.2(I) and

Exhibit G. In addition, copies of relevant

orders, if any, obtained by the applicant

from other regulatory bodies would be

required. However, we are proposing to

eliminate a requirement that copies of

the applications filed with those bodies

be filed with the Commission, as this

information largely duplicates the

information required in our Part 33

regulations.

Proposed § 33.8—number of copies—

includes the information required in the

current § 33.6 and also would require

that the applicant file electronic as well

as paper copies of any competitive

screen analysis filed pursuant to

proposed §§ 33.3 and 33.4.

Proposed § 33.9—protective orders—

would require an applicant to include a

proposed protective order if it seeks

privileged treatment for any information

submitted. The protective order would

enable the parties to review any of the

data, information, analysis or other

documentation relied upon by the

applicant to support its application and

for which privileged treatment is

sought.

C. Proposed Filing Requirements

Applicable to Merger Filings

1. Applicability

The following filing requirements

apply to merger applicants which are

defined as any public utility that either:

(a) Would have control of the

jurisdictional facilities transferred to

another entity, whether the transfer of

control is effectuated, directly or

indirectly, by merger, consolidation or

other means; or (b) would acquire

control over facilities of another entity,

whether the transfer of control is

effectuated, directly or indirectly, by

merger, consolidation or other means.15

We are proposing that for any corporate

transaction that results in a direct or

indirect merger of public utilities, the

applicant must file certain additional

information. If the merger transaction

involves a horizontal combination of

facilities which results in a single

corporate entity obtaining ownership or

control over generating facilities of

unaffiliated parties, the applicant must

file the information set forth in § 33.3.

If the merger transaction involves a

vertical combination of facilities

resulting in a single corporate entity

obtaining ownership or control over

businesses that provide inputs to

electric generation and electric

generation products that were

previously unaffiliated, the applicant

must file the information set forth in

§ 33.4.16

2. Effect on Competition

The Commission’s competitive

concern in any type of merger involving

jurisdictional electric utilities is

whether the merger will result in higher

prices or reduced output in electricity

markets. This may occur if the merged

firm is able to exercise market power,

either alone or in coordination with

other firms. Therefore, we are now

proposing filing requirements,

consistent with Appendix A to our

Policy Statement, that will address this

concern in a predictable and expedited

fashion.

a. Proposed Analytic Requirements. In

Appendix A to our Policy Statement, we

outlined a standard analytic framework

for evaluating mergers as well as a

competitive screen analysis and data

specifications to allow the Commission

to quickly identify proposed mergers

that are unlikely to present competitive

concerns. Since the Policy Statement

was issued, we have gained valuable

experience analyzing mergers and are

now proposing filing requirements

regarding the screen and the data

needed for it.

The Commission emphasizes that the

screen is not meant to be a definitive

test of the competitive effects of a

proposed merger. Instead, it is intended

to provide a standard, conservative

check to allow the Commission and

potential applicants to identify mergers

that are unlikely to present competitive

problems. A standardized screen

approach allows applicants, intervenors

and the Commission to have a common

starting point from which to evaluate

proposed mergers. A conservative

screen also allows us to quickly approve

mergers that pass if they are otherwise

consistent with the public interest.

Failing the initial screen does not

necessarily mean that the Commission

will not eventually approve the merger.

Rather, it means only that the

Commission must take a closer look at

the competitive impacts of the proposed

merger.

When a proposed merger fails the

screen and further evaluation is

necessary, the Commission will

determine what procedures are

appropriate. The Commission

recognizes that these procedures,

whether trial-type evidentiary hearings

or paper hearings, should not delay the

processing of mergers unnecessarily and

should address the competitive impact

of the proposed merger. We solicit

comments on alternative procedures for

investigating mergers that do not pass

the initial screen.17

As we propose these filing

requirements, the Commission

recognizes the tension between the need

for providing standardization regarding

how proposed mergers will be evaluated

and the need for flexibility, given the

changing nature of the electric power

industry and the likely evolution of

analytic techniques and capabilities.

The competitive screen analysis that we

require provides for standardization.

However, applicants are free to provide

an alternative analysis, if they believe

the additional information would aid

the Commission’s decision making.18

The Commission solicits comment on

whether the proposed approach strikes

the proper balance between

standardization and flexibility.

Finally, we recognize that some types

of data, or data for some market

participants, may not be available to the

applicants. Where that is the case, we

propose that applicants make their best

efforts to provide accurate substitute

data.19 Applicants would have to

identify such instances, and explain

how specific data deficiencies are

addressed and the effect on their

analysis. We also encourage applicants

to provide corroborating data and to

explain how such additional data

corroborates the results of the screen

analysis. Corroborating information and

analysis will provide the Commission

with confidence that the results of the
20344 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

20The specific filing requirements are set forth in

§ 33.8 of the proposed regulations.

21Policy Statement at 30,118.

22These specific filing requirements are set forth

in § 33.3 of the proposed regulations.

23The specific filing requirements for applicants

addressing other factors and mitigative measures

are set forth in § 33.2(g)(4) and § 33.2(g)(3),

respectively.

24The Policy Statement states that entities in

addition to those directly interconnected with

applicants would be included if historical

transaction data indicate that they recently have

been trading partners with any of the applicants.

Policy Statement at 30,130.

25The specific filing requirements are set out in

§ 33.3(c)(3) of the proposed regulations.

26The specific filing requirements are set forth in

§ 33.3(c)(3)(i) of the proposed regulations.

27Policy Statement at 30,130–31.

analysis would not change materially if

certain assumptions or input data were

changed in reasonable ways.

i. Data and format. If circumstances

warrant, the Commission must have the

ability to perform, within a reasonable

time, an independent verification of the

screen analysis presented in the

application. To do so, we (and

intervenors) must have the basic input

data in a useful format. Thus, the

proposed rule would require that the

data needed to complete the competitive

screen analysis, and any additional data

that are used, be filed electronically.20

Specific proposed data requirements for

the various components of the

competitive screen analysis are

discussed below.

ii. Horizontal Screen Analysis. As

noted earlier, the Guidelines set out five

steps for merger analysis: Assess (1)

whether the merger would significantly

increase concentration; (2) whether the

merger would result in adverse

competitive effects; (3) whether entry

would mitigate the adverse effects of the

merger; (4) whether the merger would

result in efficiency gains not achievable

by other means; and (5) whether, absent

the merger, either party would likely

fail, causing its assets to exit the

market.21

The competitive screen analysis 22

focuses on the first step: whether the

merger would significantly increase

concentration. Concentration statistics

indicate that a merger may have adverse

competitive effects, but they are not the

end of the analysis. If the applicants’

competitive screen analysis indicates

that the merger would significantly

increase concentration, the applicants

must either address the other steps in

the Guidelines or propose measures that

would mitigate the adverse competitive

effects of the proposed merger.23 If

applicants propose mitigation measures,

the screen analysis should also take into

account the effect of the remedy on

market concentration to the extent

possible.

The competitive screen analysis is

made up of four steps: (1) Identify the

products sold by the merging firms; (2)

Identify the customers affected by the

merger; (3) identify the suppliers in the

market; and (4) analyze the merger’s

effect on concentration. Below we

discuss the proposed filing

requirements for each step.

a. Products. Applicants must identify

the wholesale electricity products sold

by the merging firms. At a minimum,

such products would include non-firm

energy, short-term capacity (or firm

energy) and long-term capacity.

Products should be grouped together

when they are reasonable substitutes for

each other from the buyer’s perspective.

The supply and demand conditions for

particular electricity products may vary

substantially over time and, if so, the

market analysis should take this into

account. Periods with similar supply

and demand conditions should be

aggregated. Thus, applicants must

define and describe all products sold by

the firms, explain and support the

market conditions and groupings, and

provide all data relied upon for product

definition. The specific proposed filing

requirements are set out in § 33.3(c)(1)

of the proposed regulations.

As restructuring in the wholesale and

retail electricity markets progresses,

short-term markets appear to be growing

in importance. The role of long-term

capacity markets appears to be

diminishing. We seek comments on the

assessment of long-term capacity

markets in merger analysis.

The delivered price test, which we

require applicants use to identify

suppliers in a market, addresses the

ability of suppliers to deliver energy to

relevant markets as measured by their

short-term variable costs. However,

there is no good measure for long-term

capacity prices per se. Therefore, we

seek comment on the appropriate

analytic framework for evaluating longterm capacity products.

b. Geographic markets: Customers

(Destination Markets). As discussed in

the Policy Statement, identifying the

customers likely to be affected by a

merger is one part of defining the

geographic scope of the relevant market.

At this time, we believe that, at a

minimum, affected customers would

include all entities that are directly

interconnected to any of the applicants

or that have purchased wholesale

electricity from any of the applicants in

the past two years. The Commission

solicits comment on whether two years

is the appropriate period of purchases

for deciding to include purchasers as

affected customers.24 Customers

considered to be affected by the merger

and included in the analysis are referred

to as ‘‘destination markets.’’ To simplify

the analysis, customers that have the

same supply alternatives, as identified

in the competitive screen analysis,

could be aggregated into a single

destination market.

Applicants would be required to

provide all data used in determining the

affected customers. The specific

proposed filing requirements associated

with identifying affected customers are

set out in § 33.3(c)(2) of the proposed

regulations.

c. Geographic markets: Suppliers.

Defining the relevant geographic market

also requires identifying the sellers that

can compete to supply a relevant

product. Suppliers must be able to reach

the destination market both

economically and physically.

In some cases, potential suppliers

may be parties to mergers that have been

announced but not yet consummated.

Without presupposition, the

Commission seeks comments on

whether those suppliers should be

treated in the competitive screen

analysis as if their merger has been

consummated or whether they should

be treated as independent rivals.25

(1) Delivered Price Test

To determine the suppliers that can

economically supply a destination

market, applicants must conduct a

delivered price test.26 In the delivered

price test, a supplier is considered to be

able to economically serve destination

markets only to the extent it has

generating capacity that can be supplied

and delivered to the market at a price,

including paying for transmission and

ancillary services needed to deliver

power to a destination market, that is no

more than 5 percent above the premerger market price.27 Applicants must

then adjust, if necessary, the capacity of

each supplier identified in the delivered

price test consistent with the physical

transmission capacity available to reach

the destination market.

The Commission proposes to require

that a supplier’s ability to economically

serve a destination market be measured

by the generating capacity controlled by

the supplier rather than historical sales

data. Since merger analysis should, to

the extent possible, be forward-looking,

capacity is a better indicator of future

market supply alternatives. Information

about current or past sellers may not

identify those participants whose

generation capacity could discipline
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20345

28Baltimore Gas & Electric Company and

Potomac Electric Power Company, Opinion No.

412, 76 FERC ¶ 61,111 (1996), 79 FERC ¶ 61,027 at

61,120–21 (1997) (BG&E/PEPCO). This is not to say,

however, that sales data are irrelevant to market

analysis. If sales data indicate that certain

participants actually have been able to reach the

market in the past, it is appropriate to consider

whether they are likely candidates to be included

in the market in the future. BG&E/PEPCO at n.72.

It is for this reason that we propose to require a

‘‘trade data check’’ as part of the competitive screen

analysis.

29Long-term firm contracts are those with a

remaining commitment of more than one year.

30Native Load Customers are defined as the

wholesale and retail power customers on whose

behalf a utility, by statute, franchise, regulatory

requirement, or contract, has an obligation to

construct and operate the system to meet the

reliable electric needs of such customers.

31Uncommitted capacity is total capacity less the

capacity needed to serve native load and

contractual commitments and to cover reserve

margins. In contrast to economic capacity, this

measure, as well as total capacity, does not take into

account whether the capacity can economically

serve a market.

32We have noted such inaccuracies in our

analysis in a prior case. See B&GE/PEPCO at

61,119–120.

33Hourly data are available in electronic format

from the FERC Form 714, Annual Electric Control

and Planning Area Report.

future price increases. Moreover, data

on sales made in a past environment

that was characterized by monopoly and

cost-based rates may not be a good

indicator of how firms will behave in an

environment that is increasingly

characterized by generation competition

and open access transmission.28

In the Policy Statement, we discussed

two generating capacity measures that

are appropriate for the competitive

screen analysis: economic capacity and

available economic capacity. We

propose that the competitive screen

analysis filed by applicants use both

measures to gauge supplier presence.

The starting point for calculating

economic capacity is the supplier’s own

generation capacity with low enough

variable costs that energy from it could

be delivered to a market, after paying all

necessary transmission and ancillary

service costs (including losses), at a

price that is 5 percent or less above the

pre-merger market price. This capacity

must be decreased to reflect the capacity

committed to long-term firm sales and

increased to reflect the capacity

acquired by long-term firm purchases.29

Capacity that is under the operational

control of a party other than the owner

should be attributed to the party for

whose economic benefit the unit is

operated. The resulting amount is the

capacity that should be counted as a

supplier’s economic capacity.

The other measure of supplier

presence relevant to the competitive

screen analysis is available economic

capacity. Available economic capacity is

calculated as economic capacity less the

capacity needed to serve native load

customers.30 We propose that applicants

include this measure in their screen

analysis for all suppliers that have

native load commitments. This measure

presumes that the lowest-cost capacity

is used to serve native load and is thus

not available to compete in wholesale

power markets. However, restructuring

in the electricity industry, including

regional independent systems operators

(ISO) and bid-based power exchanges

and retail access, may well affect this

presumption. The Commission seeks

comments on the role of native load and

the weight that the available economic

capacity measure should be given, in

market analyses.

Applicants may include additional

capacity measures, such as total

capacity and uncommitted capacity, as

they see fit.31

Determining which suppliers may

economically serve the relevant

destination markets requires data

regarding generation costs, transmission

prices, and transmission limitations. To

facilitate the Commission’s analysis,

these data should be filed electronically

and presented in a standard format.

Discussed below are the proposed

general data requirements that we

believe are needed to determine the

suppliers in the relevant market for a

competitive screen analysis.

Generating capacity and variable cost:

The basic determinants of a supplier’s

presence in a market are the generating

capacity that the supplier controls and

the variable costs associated with that

capacity. For each potential supplier to

a relevant market, applicants must file

the publicly available generation

capability and variable cost data for

each generating plant or unit. Aggregate

plant level data from plants with units

that burn different fuels can result in

average plant variable costs that

inaccurately state the units’ economic

ability to sell into a market.32 For such

plants, cost data at the unit level are

preferable to cost data at the plant level,

and applicants should file disaggregated

plant data to the extent it is publicly

available. The specific filing

requirements for generating unit data

are set out in § 33.3(d)(1) of the

proposed regulations.

Purchase and sales data adjustments:

Data regarding the long-term purchases

and sales of suppliers should be filed

with the application. These data would,

to the extent available, include the

buyer, the seller, the contract duration,

the degree of interruptibility, the

quantity (MW), the capacity and energy

charge. Applicants must show the

adjustments made to suppliers’ capacity

due to the long-term contracts. The

specific filing requirements for purchase

and sales data are set out in § 33.3(d)(2)

of the proposed regulations.

Native load commitment adjustments:

If applicants use the available economic

capacity measure in the competitive

screen analysis, they must file historical

data regarding hourly native load

commitments for the most recent two

years, if such data are publicly

available.33 The Commission seeks

comment on whether two years is the

appropriate period for requiring native

load data. The specific filing

requirements for reporting native load

commitments are set out in § 33.3(d)(3)

of the proposed regulations.

Other adjustments to supplier

capacity: Other adjustments to reflect a

supplier’s competitive ability to serve a

destination market may be appropriate.

Applicants must support any such

adjustments with adequate analyses and

set out all data and assumptions used.

The specific filing requirements are set

forth in § 33.3(c)(3)(ii) of the proposed

regulations.

There may be instances where a

generation supplier’s ability to

participate in markets is limited by

statutory restrictions. For example, the

tax-exempt status of municipal

generators can be jeopardized if they

sell more than a certain percentage of

their tax-exempt financed generation to

private utilities. Another example is the

geographic limitations placed on the

Tennessee Valley Authority’s wholesale

sales activities. Failing to recognize

such restrictions could overstate the

ability of such generation suppliers to

compete and thereby to discipline

prices in a market. Applicants must

describe any statutory restrictions that

may apply to generation suppliers

included in their competitive screen

analyses.

Another adjustment that may be

needed to accurately represent a

supplier’s ability to sell into markets is

reserve requirements for reliability or

other reasons. Generation capacity that

must be held in reserve is not available

to be sold into markets on a firm basis

to respond to price increases, and

therefore should not be attributed to the

supplier in the competitive screen

analysis. Applicants must describe

reserve requirements and discuss how

those requirements affect the

availability of each unit included in the

competitive analysis.

Finally, we note that one type of

adjustment that applicants have

proposed is to limit a supplier’s
20346 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

34Ohio Edison Company, et al., 80 FERC ¶ 61,039

at 61,104 (1997) (FirstEnergy).

35Policy Statement at 30,131.

36Non-public utilities that are members of

Regional Transmission Groups (RTGs) are required

to file transmission tariffs with the RTG. Maximum

rates may be found in the RTG tariffs. Such

information also may be available on a non-public

utility’s OASIS.

37For public utilities (and non-public utilities

with OASIS), evidence should be available from

OASIS archives. OASIS database transaction data

must be retained and made available upon request

for three years after they were first posted. See 18

CFR 37.7.

38Policy Statement at 30,131.

39 Delmarva at 61,408.

40 FirstEnergy, 80 FERC at 61,105–106.

capacity, for purposes of calculating

market shares, to the demand of

individual destination markets. The

Commission found that such an

adjustment is not appropriate because it

is inconsistent with the Commission’s

concern with the relative ability of

suppliers to dominate a market.34 We

seek comments on this approach.

Transmission prices and loss factors:

An important factor in determining

whether capacity can serve a destination

market is the transmission costs that

would be incurred in delivering

generation services to a destination

market. The Policy Statement recognizes

that prices paid for transmission and

ancillary services should be added to

the variable costs of a supplier’s

capacity.35 For purposes of the

competitive screen analysis, applicants

must use the maximum tariff rates in

public utilities’ open access tariffs on

file with the Commission. Where a nonpublic utility’s transmission system is

involved, the maximum tariff rates

under its non-jurisdictional (NJ) open

access reciprocity tariff would be used.

If an NJ tariff for an entity has not been

submitted to the Commission,

applicants should use their best efforts

to obtain or estimate transmission and

ancillary services rates.36 Transmission

and ancillary service prices used in a

competitive screen analysis, that are not

found in publicly-available tariffs or rate

schedules, would have to be adequately

supported.

Consistent with the conservative

nature of the competitive screen

analysis, the Commission proposes to

require that the transmission prices

used be the maximum tariff rates in the

open access tariffs. Applicants could

present, in addition to the required

screen analysis, a separate analysis

using lower discounted transmission

rates if applicants can demonstrate that

discounted lower rates have been

generally available and that discounting

is likely to be available in the future.37

Restructuring efforts in some regions

may result in transmission pricing

regimes that depart from traditional

system-specific, average cost prices. We

propose to require that the transmission

pricing used in the competitive screen

analysis and the data presented in the

filing reflect the transmission pricing

regime in effect in the relevant

geographic markets.

For each transmission system that a

supplier must use to deliver energy to

a relevant destination market,

applicants must provide specific data,

including the transmission provider’s

name, the firm and non-firm point-topoint rates as well as the ancillary

services rates, loss factors and an

estimate of the cost of supplying energy

losses. Where tariff rates that are

expressed as $/MW are converted to $/

MWH, applicants would have to explain

the conversion. Applicants must also

explain how suppliers are assigned

transmission contract paths to the

destination markets. The specific filing

requirements for transmission rate and

loss factor data are set out in § 33.3(d)(4)

of the proposed regulations.

Market price: As discussed in the

Policy Statement, a supplier’s capacity

may be included in a relevant market,

for purposes of the competitive screen

analysis, if it can be delivered into the

market at a price that is no more than

5 percent above the pre-merger market

price.38 We therefore propose that the

application present and support market

prices for each relevant destination

market under various significant market

conditions. Significant market

conditions include, for example, those

characterized by periods of high (peak)

or low (off-peak) demand and by

transmission constraints.39

As discussed in the Policy Statement,

the Commission does not believe that all

electricity markets have matured

sufficiently to exhibit single marketclearing prices for various products.

Therefore, applicants may estimate

market prices using surrogate measures.

The Commission seeks comments on

whether there are appropriate criteria

for determining when surrogate price

measures are needed. We do not

propose at this time a specific method

for estimating market prices. However,

the results must be supported and

consistent with what one would expect

in a competitive market. For example,

we would expect prices to vary little

from customer to customer in the same

region during similar demand

conditions (if there are no transmission

constraints), but we would expect prices

to vary between peak and off-peak

periods.40 Where results that are at odds

with those that would be expected

under competitive market conditions

are shown, applicants would explain

such results. We also encourage

applicants to use more than one

approach to estimating market prices in

order to demonstrate that the market

price estimates are valid.

To support the market price estimates,

applicants must file any cost or sales

data relied upon in estimating the price,

as well as an explanation of how the

data were used to determine the

estimates. The specific filing

requirements for market price data are

set out in § 33.3(d)(5) of the proposed

regulations.

(2) Transmission Capability

The capacity of suppliers that is

determined to be economic in a relevant

destination market (that is, capacity that

can be delivered at a cost that is no

more than 5 percent above the premerger market price) may be included

in a relevant market, for purposes of the

competitive screen analysis, only to the

extent that transmission capability is

available to the supplier. Such capacity

is calculated as the sum of available

transmission capability (ATC) and any

firm transmission rights held by the

supplier that are not committed to longterm transactions. Thus, the extent of

transmission capability and the

allocation of the rights to use that

capability are the important factors in

determining a supplier’s ability to

physically reach a market. This section

discusses the data and analyses that we

propose to require to allow us

independently to estimate each

economic supplier’s ability to reach a

market.

Physical capability: For those

suppliers determined to be able to

economically serve a relevant

destination market, applicants must

present data on transmission capability

for each transmission system a supplier

must use to deliver energy to relevant

destination markets. To the extent

available, these data would include total

transfer capability (TTC) and firm ATC,

and must be consistent with values

posted on the OASIS. We are, however,

concerned that the sum of transfer

capabilities reported on OASIS sites

could exceed the simultaneous transfer

capability. We therefore propose that

the transmission capability be reported

as simultaneous transfer capability to

avoid attributing more generating

capacity to a market than could actually

reach it under actual operating

conditions. The Commission

understands, however, that

simultaneous transfer capability data

may not be generally available. Where

that is the case, applicants must use the
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20347

41 FirstEnergy at 61,104.

42Wisconsin Electric Power Company, et al.

(Primergy), 79 FERC ¶61,158 at 61,694 (1997), and

FirstEnergy at 61,107.

43 FirstEnergy at 61,103–04.

best data available to avoid

overestimating transfer capability. For

example, the analysis should not add

together the capabilities of several

interfaces if the transfer capability into

a market is limited by the same

facility.41

Applicants must also identify the

hours when transmission constraints

have been binding and the levels at

which they were binding. The

application would also present data

regarding whether and how the

proposed merger would change line

loadings and the consequent effect on

transfer capability. To the extent

possible, applicants would provide

maps showing the location of

transmission facilities where binding

constraints currently occur or are

expected to occur as a result of the

merger. The Commission seeks

comment regarding the parameters that

determine when a binding constraint is

significant enough to cause competitive

concern. For example, is there a

minimum number of hours that a

constraint must last to be of concern?

The Commission understands that

applicants must depend on publiclyavailable information regarding

transmission capability for systems

other than their own, and that some of

the information discussed above may

not be generally available for all

systems. Applicants should file the best

available data regarding systems other

than their own. However, all of the data

discussed in this section regarding

applicants’ systems is available to the

applicants, and such data must be filed,

even if it is not available for all other

systems. An accurate representation of

transmission conditions on or close to

the applicants’ systems, where the

merger’s effects are likely to be greatest,

is important. The specific filing

requirements for transmission capability

data are set out in § 33.3(d)(7) of the

proposed regulations.

Firm transmission rights:

Transmission capacity along

transmission paths between suppliers

and destination markets that is reserved

under a long-term firm transmission

contract by suppliers should be

presumed to be available to other

suppliers unless the capacity is

committed to a long-term power

transaction. Applicants must identify

such transmission capability and

provide supporting information,

including the FERC rate schedule

numbers if the transmission provider is

a public utility. The specific filing

requirements for firm transmission

rights data are set out in § 33.3(d)(8) of

the proposed regulations.

Allocation of transmission capability:

Transmission capability that is not

subject to existing firm reservations by

others may be presumed for purposes of

the competitive screen analysis to be

available to economic suppliers to reach

the relevant markets. However, this

would not be the case for transmission

capability on interfaces that would

become internal to the merged firm after

the merger. If, after a merger, the merged

firm would have either generating

resources or load on both sides of the

interface, and would have ownership or

entitlement interests in the interface on

both sides, the transmission capability

on that interface could be used to serve

native load. Since native load generally

would have a higher reservation priority

than most third party uses, it could

preclude access by other suppliers to

that interface.42 Consistent with past

decisions, the Commission proposes

that, for purposes of the competitive

screen analysis, it would be

inappropriate to allocate to competing

sellers unreserved capability over

interfaces internal to the merged

company unless the applicants

demonstrate that: (a) the merged

company would not have adequate

economic generating capacity to use the

interface capability fully, (b) the

applicants have committed that the

portion of the interface capability

allocated to third parties actually will in

fact be available to such parties, or (c)

alternate suppliers have purchased the

transmission capability on a long-term

basis.43 Any allocation of internal

transfer capability to third parties

consistent with the above guidance

must be adequately explained and

supported.

In many cases, multiple suppliers

could be subject to the same

transmission path limitation to reach

the same market, and the sum of their

economic generation capacity could

exceed the transmission capability

available to them. Where this situation

arises, the competitive screen analysis

would have to allocate the transmission

capability among the suppliers’

generating capacity. There are a number

of methods for accomplishing this.

Applicants must describe and support

the method used and show the resulting

transfer capability allocation. The

Commission is not proposing a single

method at this time, but we invite

comments on the merits of various

approaches to allocating transmission

capability in the competitive screen

analysis.

Summary of supplier presence. The

Commission proposes to require that

applicants provide a table summarizing

supplier presence in each of the relevant

destination markets. The table would

include the market designation, the

product, the name of each supplier, and

the amount of generation capacity that

each supplier can economically deliver

to the market after accounting for

available transmission capability. The

specific filing requirements for this

summary of supplier presence are set

out in § 33.3(d)(9) of the proposed

regulations.

(3) Historical Data

The Commission proposes that

applicants file certain historical data

that can be used to corroborate the

results of the competitive screen

analysis. We understand that applicants

must depend on publicly-available

information for the vast majority of the

screen analysis and that some detailed

data may not be generally available for

all market participants. However,

certain important data regarding

applicants’ transactions and

transmission systems are available to

the applicants and should be filed.

Trade data. The Commission

proposes to require that applicants file

actual trade data regarding sales and

purchases in which applicants

participated for the most recent two

years for which data are available. These

data will be used to corroborate the

suppliers identified as participating in

the relevant destination market and the

extent of their participation. We would

expect some correlation between the

results obtained by the competitive

screen analysis and recent trade

patterns. Applicants must provide an

explanation of any significant

differences.

We propose to require applicants to

file trade data regarding all electricity

sales and purchases in which they

participated, identifying the seller, the

buyer, the characteristics of the product

traded and the price. The specific filing

requirements for this historical trade

data are set out in § 33.3(d)(10).

Transmission service data. The

competitive screen analysis evaluates

the ability of suppliers to access

relevant markets economically and

physically. One of its critical

components is the availability of

transmission capacity. While applicants

would be required under the proposed

rule to file estimates of ATC and TTC

used in the competitive screen analysis,

historical transmission service
20348 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

44See n.11 supra.

45These factors are those discussed in steps two

through five of the DOJ Guidelines.

46 Guidelines, 57 FR at 41,561.

47 Id. at 41,561–562.

48For example, we found in Primergy that timely

entry would not occur and thus was not a

mitigating factor to the anticompetitive effects of

the proposed merger. 79 FERC 61,158 at 61,695–

696.

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

information would be valuable to

corroborate the results of the analysis

that use ATC and TTC estimates. The

Commission therefore proposes to

require that applicants submit a

description of all instances in the two

years preceding the application in

which transmission service on their

systems has been denied, curtailed or

interrupted. This description should, to

the extent such data are available from

OASIS sources, identify the requestor,

the type, quantity and duration of

service requested, the affected

transmission path, the period of time

covered by the service requested, the

applicants’ response, the reasons for the

denial and the reservations or other use

anticipated by the applicants on the

affected transmission path at the time of

the request. The specific filing

requirements for this transmission

service data are set out in § 33.3(d)(11).

d. Concentration Statistics. The final

step of the competitive screen analysis

is to assess market concentration.

Applicants must file pre- and postmerger market concentration statistics

calculated in accordance with the

preceding sections. Both HHIs and

single-firm market share statistics

should be presented. The specific filing

requirements for concentration statistics

are set out in § 33.3(c)(4) of the

proposed regulations.

The HHI statistics would be compared

with the thresholds given in the

Guidelines.44 If the thresholds are not

exceeded, no further analysis need be

provided in the application. If an

adequately supported screen analysis

shows that the merger would not

significantly increase concentration, and

there are no interventions raising

substantial concerns regarding the

merger’s effect on competition which

cannot be resolved on the basis of the

written record, the Commission would

not look further at the effect of the

merger on competition. If, however, the

HHI statistics exceed the thresholds, the

applicants must either propose

mitigation measures that would remedy

the merger’s potential adverse effects on

competition or address the other DOJ

merger analysis factors.

e. Mitigation Measures and Analysis

of Other Factors. In lieu of addressing

the additional factors that would lessen

concern regarding the adverse

competitive impact of a proposed

merger, applicants may propose

mitigation measures. Proposals must be

specific, and the applicant must

demonstrate that proposed measures

adequately mitigate any adverse effects

of the merger.

Some mitigation measures can be

shown to directly lower market

concentration. Examples of such

measures are generation divestiture and

transmission rate reforms (such as the

elimination of pancaked rates) that

broaden the geographic market. A

properly structured ISO or other

regional transmission entity can lower

concentration by both eliminating the

pancaking of rates and encouraging new

entrants. Where such measures are

proposed, the application must also

include, to the extent possible, a

separate analysis demonstrating the

effect of the proposal on market

concentration. Other measures may not

be directly linked to decreases in market

concentration. Where such other

measures are proposed, the application

must include an analysis demonstrating

how the proposed measure will ensure

that the merger will not adversely affect

competition in markets where the

screen analysis shows a significant

adverse effect on concentration. The

specific filing requirements concerning

mitigation measures are set out in

§ 33.2(g)(3).

Where the competitive screen analysis

indicates concentration results that

exceed the thresholds but mitigation

measures are not proposed, applicants

must provide additional analysis. The

Guidelines describe four additional

factors to examine in situations where

merger-induced concentration exceeds

specified thresholds.45 These factors

provide additional information that can

be used to determine if a merger raises

significant competitive concerns and, if

so, if there are countervailing

considerations. Based on the

Guidelines, the Commission proposes

that applicants evaluate the following

four factors if the results of the screen

analysis show that the concentration

thresholds are exceeded: the potential

adverse competitive effects of the

merger; whether entry by competitors

can deter anticompetitive behavior or

counteract adverse competitive effects;

the effects of efficiencies that could not

be realized absent the merger; and

whether one or both of the merging

firms is failing and absent the merger

the failing firm’s assets would exit the

market.

Applicants’ analysis of these

additional factors must be consistent

with the standards discussed in the

Guidelines. For example, the Guidelines

require that entry must be timely, likely

and sufficient in magnitude to deter or

counteract the adverse competitive

effects of concern in order to be

considered an effective mitigating

factor.46 The Guidelines suggest that

entry must occur within two years of the

merger to be considered timely, and that

all phases of entry must occur within

the two-year period, including planning,

design, permitting, licensing and other

approvals, construction and actual

market impact.47 Given the current lead

times for bringing new generation or

transmission capacity on line, it may be

unlikely that entry can be a mitigating

factor unless facilities are already in the

planning or construction stages at the

time of the application.48 The specific

filing requirements for these additional

factors are set out in § 33.2(g)(4) of the

proposed regulations.

f. Merger applications that are exempt

from filing a competitive screen

analysis. There are mergers where the

filing of a full-fledged horizontal or

vertical screen analysis may not be

warranted because it is relatively easy to

determine that such merger proposal

will not have an adverse impact on

competition (e.g., one of the merging

parties operates entirely on the East

Coast and the other merging party

operates entirely on the West Coast).

The Commission applied the policy of

not always requiring a full competitive

screen analysis in its approval of the

Duke/PanEnergy merger, finding that

even though applicants had not

performed a complete Appendix A

analysis, nevertheless the generating

facilities of PanEnergy are so small and

are located at such a great distance from

Duke Power Company’s market that

consolidating them is likely to have a

negligible effect on market

concentration.49

Similarly, some mergers that only

incidentally involve public utilities

would not require a rigorous

competitive screen analysis. An

example is when major financial firms

change their ownership structure in

some way and one or both have a power

marketing subsidiary. In this case, the

principal interest in jurisdictional

facilities would be the market-based

power sales tariff of the power marketer

since it would not own or control any

generation.

Therefore, with regard to horizontal

mergers, we propose that a merger

applicant need not provide the full

competitive screen analysis otherwise

required under § 33.3 if the applicant
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20349

50Policy Statement at 30,113.

51See Enova, LILCO, NORAM, Duke/PanEnergy,

PG&E Corporation and Valero Energy Corporation,

80 FERC ¶ 61,041 (1997) (PG&E/Valero); Destec

Energy, Inc. and NGC Corporation, 79 FERC,

¶ 61,373 (1997) (Destec/NGC); Enron Corporation,

78 FERC, ¶ 61,179 (1997) (Enron).

52These specific filing requirements are set forth

in § 33.4 of the proposed regulations.

53There may be several relevant upstream input

products (such as fuel transportation and turbine

manufacturers).

54Horizontal mergers may give rise to a higher

market share for the merged entity and increase

concentration in the market. Market share and

concentration are not directly affected by a solely

vertical merger.

55See Enova, 79 FERC ¶ 61,372 at 62,560.

56Foreclosure can also result from a vertical

merger if the downstream merging firm refuses to

purchase from input suppliers other than its

upstream affiliate.

57See Enova, 79 FERC ¶ 61,372 at 62,560.

58Anticompetitive coordination refers generally

to the exercise of market power through the

concurrence of other (non-merging) firms in the

market or on coordinated responses by those firms.

Continued

affirmatively demonstrates that the

merging entities do not operate in the

same geographic markets or, if they do,

the extent of such overlapping operation

is de minimis. The Commission seeks

comment regarding the appropriate

threshold for the de minimis test.

iii. Vertical Screen Analysis. The

previous section describes the filing

requirements for the analytic framework

for evaluating the competitive effects of

horizontal mergers, that is, mergers

involving two or more jurisdictional

electric utilities. However, we noted in

the Policy Statement that we intended

to apply the same analytic framework to

mergers between electric utilities and

firms that provide inputs for electricity

generation, for example, ‘‘vertical’’

mergers.50 Mergers may have both

horizontal and vertical aspects.

Since the Policy Statement was

issued, the Commission has acted on

seven vertical mergers.51 In analyzing

these cases, the Commission developed

a basic approach for assessing whether

a vertical merger is likely to adversely

affect competition in electricity markets.

The framework used by the Commission

was informed by the DOJ/FTC approach

to evaluating vertical mergers and drew

from the analytic framework described

in the Policy Statement.

We are now formally proposing an

analytic framework and the filing

requirements to support that framework

to evaluate the competitive effects of

vertical mergers. This proposed analytic

framework is consistent with the basic

approach used by the Commission to

evaluate vertical aspects of prior

mergers.

The Commission has streamlined this

vertical analytic framework and

proposes certain abbreviated filing

requirements and limitations on the

scope of our review.52 This should

greatly reduce the number of

applications that will require a complete

analysis of the vertical aspects of a

proposed merger involving a

jurisdictional public utility.

For example, a merger cannot impair

competition in ‘‘downstream’’

electricity markets if it involves an

input supplier (the ‘‘upstream’’ merging

firm) that sells: (1) a product that is used

to produce only a de minimis amount of

the relevant product in the downstream

geographic market or (2) no product into

the downstream electricity geographic

market. If such a showing is made, an

applicant will not be required to file

additional information regarding the

vertical aspects of a proposed merger.

We believe these proposed abbreviated

filing requirements will result in the

expeditious processing of mergers that

clearly present no vertical competitive

concerns.

In cases where more complete

information is necessary for the

Commission to determine the

competitive effects of a vertical merger,

we propose an analytic framework

comprising four elements: (1) define the

relevant products traded by the

upstream and downstream merging

firms; 53 (2) define the relevant

downstream and upstream geographic

markets; (3) evaluate competitive

conditions using market share and

concentration HHI statistics in the

downstream and upstream geographic

markets; and (4) evaluate the potential

adverse effects of the proposed merger

in relevant downstream and upstream

geographic markets and, if appropriate,

other factors that can counteract such

effects, including the ease of entry into

either the upstream market or the

downstream market and merger-related

efficiencies.

We propose establishing the same

filing requirements for the components

of the proposed vertical analytic

framework that have counterparts in the

horizontal screen analysis, such as

defining relevant downstream

geographic markets using a delivered

price test. Filing requirements for other

parts of the vertical analysis, such as

defining upstream geographic markets,

would be only generally specified. Our

proposed analytic framework for

analyzing the competitive effects of

vertical mergers and associated filing

requirements are explained more fully

below. We solicit comments on both the

reasonableness of the framework and

the adequacy of the information

required to analyze vertical competitive

issues.

a. Vertical Analytic Framework. As

discussed earlier, the Commission’s

competitive concern in any merger

involving jurisdictional electric utilities

is whether the merger will affect

competition in electricity markets

through higher prices or reduced

output. Horizontal mergers can cause

this by eliminating a competitor from

the market and by the exercise of market

power by the merged firm. Vertical

mergers do not directly eliminate a

competitor from the market but may

create or enhance the incentive for the

merged firm to adversely affect prices

and output in the downstream

electricity market.54 This effect on

prices and output can occur in a number

of ways, including: (i) foreclosure/

raising of rivals’ costs; (ii) facilitating

coordination; and (iii) evasion of

regulation.55

Foreclosure/Raising Rivals’ Costs: A

merger between an entity owning

downstream electric generation and an

entity owning an upstream input

supplier to competitors of that

generation may create the incentive for

the upstream firm to exclude the merged

firm’s downstream generation

competitors from access to inputs. The

upstream merging firm can accomplish

this through pricing, marketing and

operational actions that would raise the

input costs of suppliers competing with

the downstream merging firm or by

otherwise restricting such suppliers’

input supply.56 This behavior can also

deter entry by rival generators in the

downstream market.57

A vertical merger can create or

enhance the ability of the merged firm

to adversely affect electricity prices or

output in the downstream market by

raising rivals’ input costs if the

upstream and downstream geographic

markets are susceptible to the exercise

of market power. Under these

circumstances in the upstream market,

generators purchasing from the

upstream merging firm could not turn to

alternative suppliers to avoid an

increase in input prices. Similarly,

customers of the merging downstream

firm would not be able to turn to

alternative electricity suppliers to avoid

an increase in electricity prices. The

Commission requests commenters to

address the extent to which vertical

mergers in the energy industry could

result in foreclosure or raising rivals’

costs problems.

Facilitating Anticompetitive

Coordination: Vertical mergers can also

facilitate anticompetitive

‘‘coordination.’’ 58 A vertical merger can
20350 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

See supra n.9. We emphasize that in the electric

utility industry, the terms ‘‘coordination’’ or

‘‘coordinating activities’’ apply in a specific

context. For example, coordinating with other firms

in downstream electricity markets in the creation of

independent system operators would not raise

competitive concerns. The Commission has also

long encouraged technical coordination in order to

promote reliability.

59There are many examples of potential

anticompetitive coordination. One possibility is if

the downstream merging firm obtains price quotes

and other sensitive competitive information from

other (non-merging) upstream suppliers and

transfers it to its upstream merging partner. The

exchange of such information among upstream

input suppliers can be potentially useful in agreeing

to raise prices or restrict output to all downstream

customers.

60Regulatory evasion could affect requirements

service customers in wholesale electricity markets.

However, we believe this is less likely to be a

concern if wholesale markets are competitive.

61Policy Statement at 30,128.

62See, Duke/PanEnergy, 79 FERC, ¶ 61,236 at

62,039.

facilitate anticompetitive coordination

in either the upstream or downstream

markets if, in either case, the merger: (1)

Creates or enhances the ability of

competing firms to agree to raise prices

or restrict output or (2) dampens the

incentive for firms to compete

aggressively on price or service.

Whether anticompetitive coordination

results in higher electricity prices or

lower output depends on the

competitive conditions in the upstream

and downstream geographic markets. In

addition, anticompetitive coordination

can be increased if information, useful

for coordinated behavior and not

available elsewhere, must be shared

between the upstream firm and its

customers, and there are substantial

transactions between the upstream

merging firm and non-affiliated

customers.59

The Commission is aware that the

potential mechanisms through which a

vertical merger could facilitate

anticompetitive coordination and the

conditions under which such

coordination would result in

competitive harm are complex and

subject to some debate. In a later

section, we solicit general comment on

anticompetitive coordination and how,

or if, it should be addressed in an

analytic framework.

Regulatory Evasion: We solicit

comment on the potential for vertical

mergers involving jurisdictional electric

utilities to result in regulatory evasion.

For example, after merging with an

upstream input supplier, a downstream

electric utility’s input purchases would

be ‘‘internal’’ to the firm. The merger,

therefore, may create the incentive for

the merging upstream input supplier to

inflate the transfer prices of inputs sold

to the downstream regulated utility to

the extent it can evade regulatory

scrutiny. Profits would increase for the

vertically-integrated firm as a result of

such a strategy but would accrue to the

unregulated affiliate. Higher electricity

prices could result from such a strategy.

The Commission notes that regulatory

evasion is a behavior that potentially

affects retail electricity prices.60

Consistent with our position taken in

the Merger Policy Statement, the

Commission does not propose to

address regulatory evasion concerns that

affect retail electricity prices unless

specifically asked to do so by a state

regulatory authority.61

We also solicit comment on our

proposed treatment of mergers in which

regulatory evasion may be a concern,

and how ongoing changes in the

industry, such as ISO development and

retail access, might affect our proposed

approach.

b. Products supplied by the upstream

merging firm are used to produce a de

minimis amount of the relevant

downstream products. As discussed

earlier, the Commission is proposing

certain instances under which only

minimal information and analysis

would be necessary to confirm that a

vertical merger poses no competitive

concern. One such instance is when the

upstream merging firm sells a product

that is used to produce only a de

minimis amount of the relevant product

in the downstream geographic market.

The Commission expects that vertical

consolidations that fall into this

category will be relatively easy to

identify. We therefore propose that

applicants would need to supply only

minimal information to make an

affirmative showing that a vertical

merger does not require further analysis

in order to determine if it would have

an adverse effect on competition in

downstream electricity markets.

If the products sold by the upstream

merging firm are used to produce a de

minimis amount of the relevant

products in the downstream geographic

market, a vertical merger should pose no

competitive concern.62 An example is

when the upstream merging firm

supplies gas transportation but almost

all of the energy in the downstream

market is produced from coal-fired

generating capacity.

The Commission proposes that

applicants desiring to make such a

showing would have to: identify

products sold by the upstream and

downstream merging firms and identify

the suppliers (by type of generation, e.g.,

gas-fired, coal-fired, that could compete

with the downstream merging firm in

providing downstream products. The

second part of this analysis, that is,

identifying the downstream suppliers, is

necessary to determine whether

customers affected by the merger could

potentially turn to alternative suppliers

in the event of a post-merger price

increase. The Commission proposes that

applicants may provide an approximate

definition of the downstream geographic

market. At this time, we will not

propose thresholds for the proportion of

output in the downstream geographic

market that is accounted for by the

inputs sold by the upstream merging

firm or other ‘‘bright line’’ tests for such

de minimis determinations.

c. The upstream merging firm does

not sell products in the geographic

market in which the downstream

merging firm resides. A vertical merger

involving an upstream firm that does

not sell into the downstream geographic

market would not affect competition in

that market. Such a merger would

involve an electric utility in a different

geographic market from that served by

the upstream firm and would raise no

competitive concerns.

The Commission proposes that

applicants desiring to make such a

showing would have to identify: (1)

Products sold by the upstream and

downstream merging firms; and (2)

downstream suppliers who purchase

inputs from the upstream merging firm

and determine if those customers

compete with the downstream merging

firm to supply downstream products.

The second part of this analysis, that is,

identifying the downstream suppliers, is

necessary to determine whether

customers affected by the merger could

potentially turn to alternative suppliers

in the event of a post-merger price

increase. The Commission proposes that

applicants could provide an

approximate definition of the

downstream geographic market.

For both of these abbreviated

showings, applicants should explain,

justify and document their analyses and

provide all supporting data and

documentation. The abbreviated filing

requirements are set forth in

§ 33.2(g)(2)(ii) of the proposed

regulations. We solicit comments: on

the reasonableness and efficacy of the

proposed abbreviated filing

requirements provisions; approaches to

approximating the downstream

geographic market; and appropriate de

minimis thresholds for the amount of

downstream output produced by inputs

sold by the upstream merging firm.

d. Components of the Analytic

Framework. Described in more detail

below are the components of the

proposed analytic framework for

vertical mergers.
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20351

63See Enova, 79 FERC ¶ 61,372 at 62,562. If

multiple upstream suppliers serve a single

generating plant or unit, applicant’s analysis would

take this into account.

64The DOJ 1984 Merger Guidelines address

vertical mergers and discuss both market share and

HHI statistics. See DOJ 1984 Merger Guidelines at

46.

65The DOJ 1984 Merger Guidelines use as a

threshold for further investigating the competitive

effect of a vertical merger a ‘‘highly concentrated’’

market. See DOJ 1984 Merger Guidelines at 46.

Because concentration thresholds are indicators of

cases in which additional investigation into the

possibility of competitive harm might be warranted,

the Commission would look further at mergers with

an HHI near 1800 or above.

1. Relevant Products

a. Downstream Market

Applicants must identify and define

the relevant products sold in the

downstream electricity market affected

by the business activity of the upstream

merging firm. The proposed

requirement for this aspect of the

vertical analytic framework is the same

as that proposed for the horizontal

screen analysis, as set forth in

§ 33.3(c)(1) of the proposed regulations.

We seek comments on how, if at all, our

proposed approach for defining relevant

products in the downstream market

should differ from that required for

horizontal mergers. We also seek

comments on any alternative

approaches.

b. Upstream Market

Applicants must identify the products

produced by the upstream merging firm

and used by the downstream merging

firm and/or its competitors in the

production of relevant downstream

electricity products. Relevant upstream

products could be grouped together

when they are good substitutes for each

other from the buyer’s perspective. Also,

the supply and demand conditions

might vary over time, creating discrete,

time-differentiated products.

Accordingly, the relevant products

identified by the applicant should be

fully explained, justified and

documented. The specific filing

requirements for identifying and

defining relevant upstream products are

set out in § 33.4(c)(1)(ii) of the proposed

regulations. The Commission seeks

comments on the proposed approach

and any alternative approaches to

defining relevant input products, and

how such approaches should vary for

different types of inputs.

2. Relevant Geographic Markets

a. Downstream Market

Defining the downstream geographic

market consists of identifying the

customers potentially affected by the

merger and the suppliers that can

compete with the merging firm to

supply a relevant electricity product. In

the proposed regulations for the

horizontal screen analysis, relevant

geographic electricity markets are

defined using the delivered price test.

Under the delivered price test, a

supplier would be considered in the

market if it has generating capacity from

which energy can be made available and

delivered to the market at a price,

including transmission and ancillary

services, no more than five percent

above the market price.

The Commission proposes that the

relevant downstream geographic market

in a vertical merger would be defined

similarly, as set out in § 33.3(c)(3) of the

proposed regulations for the horizontal

analytic framework. However, we seek

comment on the appropriateness of a

delivered price test analysis for

analyzing downstream markets in

vertical mergers. We also solicit

comments on any alternative

approaches to defining downstream

geographic markets in a vertical merger

context.

b. Upstream market

The Commission will not at this time

propose precise filing requirements for

defining upstream geographic markets.

One reason is that the Commission has

not yet acted upon an application for a

merger with vertical aspects that

required a rigorous definition of the

upstream geographic market. Another

reason is that the types of analysis and

data needed to define geographic

upstream markets may vary from input

to input. The Commission expects to

better understand the data and analysis

needed to define geographic input

markets—if such analysis proves

necessary—as we evaluate proposed

vertical mergers.

Until such time, the Commission is

proposing that applicants would

approximate the upstream geographic

market for each relevant upstream

product and submit data and

documentation necessary to support

their analysis. Such approximate

definitions of the upstream geographic

market could be based, perhaps, on

historical trade data. Applicants should

define the smallest reasonable

geographic markets.

Applicants should fully explain,

justify and document their analysis,

including all supporting data and

documentation. The filing requirements

for this aspect of the analytic framework

are set forth in § 33.4(c)(2) of the

proposed regulations. We seek comment

on appropriate approaches to defining

upstream geographic markets in vertical

mergers.

3. Evaluating Competitive Conditions in

Geographic Markets

a. Downstream Market

Once the downstream geographic

market has been defined, applicants

would assess competitive conditions in

the downstream market. To do so,

applicants would calculate market

shares for the suppliers identified in the

delivered price test and downstream

market concentration using the HHI

statistic.

The Commission proposes that for a

vertical merger, downstream market

share statistics reflect the ability of

buyers in the downstream market to

switch—in response to a price

increase—from generation served by the

upstream merging firm. Specifically, we

propose that applicants would identify

the upstream suppliers who sell or

deliver inputs to each generating unit or

plant in the downstream geographic

market. All generation capacity served

by the same input supplier would be

considered together and therefore be

given a market share, i.e., treated as if

it was owned or controlled by a single

firm.63

The Commission proposes that

applicants calculate downstream market

concentration using the HHI statistic.

While the Commission has not

explicitly reported HHI statistics for

relevant geographic markets in prior

vertical merger cases, the HHI statistic

is, along with market share, a generally

accepted indicator of competitive

conditions in a relevant market.64 As a

general matter, therefore, the

Commission proposes that markets that

are ‘‘highly concentrated’’ under the

Guidelines standard (i.e., an HHI of

1800 or above) are considered to be

conducive to the exercise of market

power and therefore should warrant

additional analysis.65

The specific filing requirements for

assessing the competitive conditions in

the downstream market are set forth in

§ 33.4(c)(3)(i) of the proposed

regulations. We solicit comments on

this approach to assessing market shares

and concentration in the downstream

market, and any alternative approaches.

b. Upstream Market

The Commission proposes that

Applicants would assess competitive

conditions in the upstream market by

calculating market shares for each

supplier identified in the delivered

price test and market concentration

using the HHI statistic. The Commission

proposes that upstream geographic

markets that are ‘‘highly concentrated’’
20352 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

66See DOJ 1984 Merger Guidelines §§ 4.211 and

4.212.

67See, Vastar Resources, Inc., et al., 81 FERC ¶

61,135 at 61,633.

68See Pipeline Service Obligations and Revisions

to Regulations Governing Self-Implementing

Transportation Under Part 284 of the Commission’s

Regulations, and Regulation of Natural Gas After

Partial Wellhead Decontrol, Order No. 636, FERC

Stats. and Regs. ¶ 30,939 (April 8, 1992), order on

reh’g, Order No. 636–A, FERC Stats. & Regs. ¶

30,950 (August 2, 1992), order on reh’g, Order No.

636–B, 61 FERC ¶ 61,272 (November 27, 1992),

reh’g denied, Order No. 636–C, 62 FERC ¶ 61,007

(January 8, 1993), order aff’d in part and remanded

in part, United Distribution Companies, v. FERC, 88

F.3d 1105 (D.C. Cir. 1996); order on remand, Order

No. 636–C, 78 FERC ¶ 61,186 (1997); rehearing

pending.

under the Guidelines standard (i.e., an

HHI of 1800 or above) are considered to

be conducive to the exercise of market

power and therefore should warrant

additional analysis.

The specific filing requirements for

assessing the competitive conditions in

the upstream market are set forth in

§ 33.4(c)(3)(ii) of the proposed

requirements. We solicit comments on

this approach to assessing market shares

and concentration in the upstream

market, and any alternative approaches.

4. Mitigation Measures and Analysis of

Other Factors

Where applicants’ analysis indicates

concentration results that raise concerns

regarding the competitive effect of the

merger, the Commission proposes that

applicants would evaluate additional

factors that could provide insight into

whether a proposed merger would be

likely to harm competition in electricity

markets. Applicants need evaluate these

factors only if competitive conditions in

the upstream and downstream markets

support the possibility that the merger

could raise rivals’ costs or facilitate

coordination, as described in the

following sections. In lieu of addressing

the additional factors that would lessen

concern regarding the adverse

competitive impact of a proposed

merger, applicants may propose

mitigation measures. Proposals must be

specific, and the applicant must

demonstrate that proposed measures

adequately mitigate any adverse effects

of the merger.

If applicants choose not to propose

mitigation, the factors that we propose

applicants evaluate in this stage of the

analytic framework are those set out in

Sections 2 through 5 of the Guidelines:

potential adverse competitive effects,

ease of entry, merger-related

efficiencies, and whether one of the

merging firm’s assets would exit the

market, but for the merger. The second,

third and fourth of these factors (entry,

merger-related efficiencies and a failing

firm rationale) can counteract any

potential competitive harm indicated by

market share and concentration

statistics. Regarding entry, the

Commission seeks comments on the

circumstances under which entry into

either the upstream or downstream

markets would be sufficient to mitigate

the potential competitive harm of a

proposed merger and the circumstances

under which entry into both markets

would be necessary.66 The first of these

factors looks more specifically at the

circumstances under which potential

adverse competitive effects would

materialize. Below, we discuss the

proposed requirements for evaluating

such circumstances for mergers posing

foreclosure/raising rivals’ costs and

anticompetitive coordination concerns.

a. Foreclosure/Raising Rivals’ Costs

If both the upstream and downstream

markets are conducive to the exercise of

market power, there is the potential for

the merger to harm competition in the

downstream geographic market by

raising the input costs of rival

downstream suppliers. As such, we

propose that applicants demonstrate

that raising rivals’ costs would be

difficult, even if the merger creates or

enhances the ability of the merged firm

to adversely affect prices or output in

the downstream market.

For example, we propose that

applicants provide adequate

information, supported by data and

documentation, regarding how the

merged firm could raise its rivals’ costs.

We propose that such information could

include, but is not limited to: (1) Types

of products or services sold by the

upstream firm to each downstream

competitor; (2) terms of contracts under

which products or services are sold and

the duration of such contracts; (3) a

description of the prices, availability

quality and input delivery points of

inputs sold to downstream competitors;

and (4) information on generation unit

scheduling, impending technological

improvements, and marketing that is

provided by customers to the upstream

firm, particularly any market-sensitive

information that may be subject to

confidentiality provisions.67 We seek

comment on how such data can be made

available to intervenors under protective

order procedures.

We also propose that applicants

would evaluate whether customers of

the upstream input supplier can readily

switch to alternative inputs to avoid a

price increase by the upstream merging

firm. If switching to alternative inputs is

possible, the merger may not create or

enhance the ability of the merging firm

to affect output and prices in the

upstream market.

We propose that applicants would

have to provide data and documentation

supporting how regulatory requirements

governing the conduct of upstream

input suppliers (such as open-access

provisions applicable to gas pipelines

under Order No. 636) 68 could

counteract any competitive harm posed

by a merger.

Finally, a raising rivals’ costs strategy

is unlikely to harm competition unless

such behavior is profitable. Therefore,

we propose that applicants would

provide data and documentation

supporting an assessment of the

profitability of a raising rivals’ costs

strategy if this data could materially

affect a conclusion that a proposed

merger could harm competition.

The filing requirements for this aspect

of the analytic framework are set forth

in § 33.2(g)(4) of the proposed

regulations. The Commission seeks

comment on the foregoing, and other

pertinent considerations that may

materially affect a finding that a

proposed vertical merger would be

likely to impair competition in

electricity markets and how such

considerations should be analyzed.

b. Facilitating Anticompetitive

Coordination

There is a possibility that a vertical

merger could harm competition in the

downstream market by facilitating

anticompetitive coordination in either

the upstream or downstream market. As

discussed earlier, whether

anticompetitive coordination results in

higher electricity prices or lower output

depends on the competitive conditions

in the upstream and downstream

geographic markets. However, since we

have not described the ways in which

a vertical merger could facilitate

coordination, it would be premature to

specify the market conditions under

which increased coordination would

warrant applicants proceeding to

evaluate additional factors.

Therefore, we solicit comments on

how a vertical merger could facilitate

anticompetitive coordination; the

conditions under which such

coordination would impair competition

in electricity markets; and the

significance of coordination problems as

they relate to the industries likely to be

affected by the vertical mergers in

which the Commission would take an

interest.

5. Remedy

In the event a vertical merger poses

competitive concerns after accounting
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20353

69Enova, 79 FERC ¶ 61,372 at 62,565 (1997).

70Policy Statement at 30,111, 30,121–24, and n.5.

See also, Morgan Stanley, 79 FERC at 61,504–05;

Duke/PanEnergy, 79 FERC at 62,039–41; Enova, 79

FERC at 62,566; Destec, 79 FERC at 62,574–75;

LILCO, 80 FERC at 61,079–80; FirstEnergy, 80 FERC

at 61,098; NORAM, 80 FERC at 61,382–8–12.

71Policy Statement at 30,112 and 30,124–25. See

also, Duke/PanEnergy, 79 FERC at 61,041–42;

Morgan Stanley, 79 FERC at 61,505; Enova, 79

FERC at 62,566–67; Destec, 79 FERC at 62,575;

LILCO, 80 FERC at 61,080; FirstEnergy, 80 FERC at

61,098–99; NORAM, 80 FERC at 61,383; and

Delmarva, 80 FERC at 61,412–13 and n.60.

72Policy Statement at 30,125.

73Appendix to DOJ Merger NOI Comments at A–

11, n12.

for the additional factors described in

the previous section, the Commission

proposes that the merger may be made

acceptable if certain remedial actions

are taken. For example, in Enova the

Commission specified certain remedies

that would address the competitive

concerns presented by that merger. The

remedies included a code of conduct,

restrictions on affiliate transactions and

an electronic gas reservation and

information system.69 We solicit

comments on the types of remedial

action that would effectively address

such competitive concerns.

3. Effect on Rates—Proposed

Requirements for Ratepayer Protections

The Commission has previously

determined that ratepayer protection

mechanisms are necessary to protect the

wholesale customers of merger

applicants (e.g., open seasons to allow

early termination of existing service

contracts or rate freezes) if the

contemplated benefits of the merger do

not materialize. If the proposed merger

raises substantial issues of fact with

regard to its impact on rates, the

Commission has stated that it will

consider further investigation of the

matter or set it for hearing.70 Therefore,

all merger applicants would be required

to demonstrate how wholesale

ratepayers will be protected, and

applicants would have the burden of

proving that their proposed ratepayer

protections are adequate. Specifically,

each proposed ratepayer protection

mechanism would clearly identify what

customer groups are covered (e.g.,

requirements customers, transmission

customers, formula rate customers),

what types of costs are covered, and the

time period for which the protection

will apply. This information should be

included in the applicants’ explanation

of the effect of the transaction on rates

required in § 33.2(g)(i) of the proposed

regulations.

4. Effect on Regulation—Proposed

Requirements Concerning the Impact on

State and Commission Regulatory

Jurisdiction

The Commission has previously

stated that, in merger filings involving

public utility subsidiaries of registered

holding companies, applicants must

either commit to abide by the

Commission’s policies with respect to

intra-system transactions within the

holding company structure or be

prepared to go to hearing on the issue

of the effect of the proposed registered

holding company structure on effective

regulation by the Commission.71

Consistent with this policy, we propose

that, for all merger applications

involving public utility subsidiaries of

registered holding companies,

applicants include such a commitment.

Since regulatory evasion can also

result, for example, from passing higher

input prices through to the retail

customers of a regulated affiliate, we

further propose that merger applicants,

in all cases, state whether the affected

state commissions have authority to act

on the proposed merger. Where the

affected state commissions have such

authority, the Commission would not

set for further investigation or hearing

the matter of whether the transaction

will impair effective regulation by the

affected state commissions. However, if

the affected state lacks authority over

the merger and raises concerns about

the effect on regulation, we will

consider, on a case-by-case basis,

whether to set this issue for hearing.72

This information should be included in

the applicants’ explanation of the effect

of the transaction on regulation required

in § 33.2(g)(1) of the proposed

regulations.

D. Emerging Issues

1. Computer Modeling

The use of computer models—

specifically, computer programs used to

simulate the electric power market—has

been raised in comments on the Policy

Statement and also in specific cases. In

comments on the Policy Statement, DOJ

recommended using computer

simulations to delineate markets and

also noted that these simulations could

be helpful in gauging the market power

of the merged firm.73 The Commission

believes that use of a properly

structured computer model could

account for important physical and

economic effects in an analysis of

mergers and may be a valuable tool to

use in a horizontal screen analysis. For

example, a computer model might prove

particularly useful in identifying the

suppliers in the geographic market that

are capable of competing with the

merged company. It could provide a

framework to help ensure consistency in

the treatment of the data used in

identifying suppliers in a geographic

market.

Therefore, we are issuing a notice of

request for written comments and intent

to convene a technical conference

concurrently with this NOPR. This

notice requests comments on the use of

computer models in merger analysis and

intends to convene a public conference

to discuss this matter. As more fully

explained in the notice, the purpose of

this inquiry is to gain further input and

insight into whether and how computer

models can be useful to our competitive

screen analysis set forth in Appendix A

of the Policy Statement.

2. Other Emerging Issues

The 1996 Policy Statement primarily

addresses horizontal mergers, but

shortly after it was adopted a number of

vertical electric-gas mergers were filed

with the Commission. For this reason,

we request comments now on whether

we should expect other new types of

corporate groupings involving public

utilities to emerge, what form they

might take, and how we should analyze

the competitive effects if such

combinations are in fact presented. We

seek comments on new kinds of mergers

that may lead to the blurring of

traditional utility services and other

business lines. Should our market

concentration analysis extend to new

products that may result from such a

convergence of business lines, even if

these products are principally

concerned with end-use markets? For

example, a combination involving a

public utility and a telecommunication

business could offer new products and

services, such as sophisticated

interactive electric metering, real-time

pricing, automatic utility control of

customer machinery and appliances to

minimize electricity costs, and

computerized shopping for the most

economical power supplier. Are our

proposed vertical merger filing

requirements adequate for review of this

form of public utility merger, to the

extent such mergers are jurisdictional?

We also request comment on how the

structural changes occurring in the

electric industry should be considered

in our analysis of the effect that public

utility mergers may have on

competition. For example, the

Commission is aware that as retail

markets evolve into regional power

markets, it may become more difficult

for individual states to adequately

examine a merger’s impact on such
20354 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

74See, Atlantic City/Delmarva, 81 FERC 61,173 at

61,755 (1997).

75 5 U.S.C. 601–612.

76 5 U.S.C. 601(3) (citing § 3 of the Small Business

Act, 15 U.S.C. 632). Section 3 of the Small Business

Act defines a ‘‘small-business concern’’ as a

business which is independently owned and

operated and which is not dominant in its field of

operation. 15 U.S.C. 632(a).

77 18 CFR Part 380.

78 18 CFR 380.4(a)(16).

79 5 CFR 1320.11 (1996).

80See Promoting Wholesale Competition Through

Open Access Non-Discriminatory Transmission

Services by Public Utilities; Recovery of Stranded

Costs by Public Utilities, Order No. 888, 61 Fed.

Reg. 21,540 (May 10, 1996), FERC Stats. & Regs.

¶ 31,036 (1996), order on reh’g, Order 888–A, 62

Fed. Reg. 12,274 (March 14, 1997), FERC Stats. &

Regs. ¶ 31,048 (1997), order on reh’g, Order 888–B,

81 FERC ¶ 61,248 (1997).

regional markets.74 We seek comment

on whether it is feasible to address

competition only at the wholesale level

and ignore changes in the market that

arise in the context of state retail choice

programs and transform retail franchise

service territories into multistate

supplier markets. Where merger

applicants are members of a multistate

ISO or regional power exchange, should

we modify our analysis and criteria and,

if so, how?

IV. Regulatory Flexibility Act

The Regulatory Flexibility Act

(RFA) 75 requires that rulemakings

contain either a description and analysis

of the effect the proposed rule will have

on small entities, or a certification that

the rule will not have a substantial

economic effect on a substantial number

of small entities. The entities that would

be required to comply with the

proposed rule are public utilities

disposing of jurisdictional facilities,

merging such facilities with such

facilities owned by another person, or

acquiring the securities of another

public utility. These entities do not fall

within the RFA’s definition of small

entities.76 Thus, the Commission

certifies that this rule will not have a

‘‘significant economic impact on a

substantial number of small entities.’’

V. Environmental Statement

The Commission concludes that

promulgating the proposed rule would

not represent a major federal action

having a significant adverse impact on

the human environment under the

Commission’s regulations implementing

the National Environment Policy Act.77

The proposed rule falls within the

categorical exemption provided in the

Commission’s regulations for approval

of actions under §§ 4(b), 203, 204, 301,

304, and 305 of the Federal Power Act

relating to issuance and purchase of

securities, acquisition or disposition of

property, merger, interlocking

directorates, jurisdictional

determinations and accounting.78

Consequently, neither an environmental

assessment nor an environmental

impact statement is required.

VI. Information Collection Statement

The following collection of

information contained in this proposed

rule has been submitted to the Office of

Management and Budget for review

under § 3507(d) of the Paperwork

Reduction Act of 1995, 44 U.S.C.

3507(d). Comments are solicited on the

Commission’s need for this information,

whether the information will have

practical utility, the accuracy of the

provided burden estimates, ways to

enhance the quality, utility, and clarity

of the information to be collected, and

any suggested methods for minimizing

respondents’ burden, including the use

of automated information techniques.

Estimated Annual Burden:

Data collection Number of

respondents

Number of

responses

Hours per

response

Total annual

hours

FERC–519 ........................................................................................................ 100 1 80 8,000

Total Annual Hours for Collection:

(Reporting + Recordkeeping, (if

appropriate)) = 8,000

Although most of the discussion in

this document focuses mainly on the

Commission’s merger policy, the NOPR

does address the filing requirements for

all data filed under the FERC–519 form.

This data collection is relevant to a

small number of mergers as well as

numerous less complex corporate

applications. The hours per response is

a weighted average time estimate based

on the projected number of merger

filings and other corporate applications.

Information Collection costs: The

Commission seeks comments on the

costs to comply with these

requirements. It has projected the

average annualized cost per respondent

to be the following:

ANNUALIZED CAPITAL/STARTUP COSTS

Annualized Costs (Operations

& Maintenance) ..................... $4,210.31

Total Annualized Costs ..... 4,210.31

The Office of Management and

Budget’s (OMB) regulations,79 require

OMB to approve certain information

collection requirements imposed by

agency rule. The Commission is

submitting notification of this proposed

rule to OMB.

Title: FERC–519, Disposition of

Facilities, Mergers and Acquisition of

Securities.

Action: Proposed collection.

OMB Control No.: 1902–0082.

Respondents: Business or other for

profit, including small business.

Frequency of Responses: On occasion.

Necessity of the information: The

proposed rule revises the requirements

contained in 18 CFR Part 33 which

implements § 203 of the FPA. This

proposed rule revises 18 CFR Part 33 by

providing applicants with more detailed

guidance for preparing applications and

is consistent with the policies set forth

in the Policy Statement. The proposed

rule is intended to lessen regulatory

burdens on the industry by eliminating

outdated and unnecessary filing

requirements, clarifying existing

requirements, and streamlining the

filing requirements for mergers that do

not raise competitive concerns.

The implementation of these

proposed filing requirements will help

the Commission carry out its

responsibilities under the FPA in

accordance with the objectives of the

Commission’s Open Access Rule 80 and

in consideration of the changing market

structures in the electric industry. The

Commission will use the data received

as a result of the proposed filing

requirements: (1) In the review of the

proposed merger of jurisdictional

facilities to ascertain whether the

merger is in the public interest; (2) for

general industry oversight; and (3) to

expedite the corporate application

review process.

Internal Review: The Commission has

reviewed the requirements pertaining to

the merger of jurisdictional facilities of

public utilities and determined that the

proposed revisions are necessary

because of continuing changes in the

electric power industry. Requiring such

filing information, as set forth in this

NOPR, would assist the Commission in
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20355

81Energy Policy Act of 1992, Pub. L. No. 102–486,

106 Stat. 2776, 2905 (1992).

determining whether proposed mergers

are consistent with the competitive

goals of the FPA, the Energy Policy Act

of 1992 81 and the Commission’s Open

Access Rule. These requirements

conform to the Commission’s plan for

efficient information collection,

communication, and management

within the electric power industry. The

Commission has assured itself, by

means of its internal review, that there

is specific, objective support for the

burden estimates associated with the

information requirements.

Interested persons may obtain

information on the reporting

requirements by contacting the

following: Federal Energy Regulatory

Commission, 888 First Street, N.E.,

Washington, D.C. 20426, [Attention:

Michael Miller, Division of Information

Services, Phone: (202) 208–1415, fax:

(202) 273–0873,

email:michael.miller@ferc.fed.us].

For submitting comments concerning

the collection of information(s) and the

associated burden estimate(s), please

send your comments to the contact

listed above and to the Office of

Management and Budget, Office of

Information and Regulatory Affairs,

Washington, D.C. 20503 [Attention:

Desk Officer for the Federal Energy

Regulatory Commission, phone: (202)

395–3087, fax: (202) 395–7285].

VII. Public Comment Procedures

The Commission invites comments on

the proposed rule from interested

persons. An original and 14 copies of

written comments on the proposed rule

must be filed with the Commission no

later than August 24, 1998.

In addition, commenters are requested

to submit a copy of their comments on

a 31⁄2 inch diskette formatted for MS–

DOS based computers. In light of our

ability to translate MS–DOS based

materials, the text need only be

submitted in the format and version that

it was generated (i.e., MS Word,

WordPerfect, ASCII, etc.). It is not

necessary to reformat word processor

generated text to ASCII. For Macintosh

users, it would be helpful to save the

documents in Macintosh word

processor format and then write them to

files on a diskette formatted for MS–

DOS machines. All comments should be

submitted to the Office of the Secretary,

Federal Energy Regulatory Commission,

888 First Street, NE, Washington, DC

20426, and should refer to Docket No.

RM98–4–000.

All written comments will be placed

in the Commission’s public files and

will be available for inspection in the

Commission’s public reference room at

888 First Street, NE, Washington, DC,

20426, during business hours.

List of Subjects in 18 CFR Part 33

Electric utilities, Reporting and

recordkeeping requirements, Securities.

By the Commission.

Linwood A. Watson, Jr.,

Acting Secretary.

In consideration of the foregoing, the

Commission proposes to revise Part 33,

Chapter I, Title 18 of the Code of

Federal Regulations, as set forth below.

PART 33—APPLICATION FOR

ACQUISITION, SALE, LEASE, OR

OTHER DISPOSITION, MERGER OR

CONSOLIDATION OF FACILITIES, OR

FOR PURCHASE OR ACQUISITION OF

SECURITIES OF A PUBLIC UTILITY

Sec.

33.1 Applicability.

33.2 Contents of application—general

information requirements.

33.3 Additional information requirements

for applications resulting in a single

corporate entity obtaining ownership or

control over generating facilities of

unaffiliated parties.

33.4 Additional information requirements

for applications resulting in a single

corporate entity obtaining ownership or

control over businesses that provide

inputs to electric generation and electric

generation products that were previously

unaffiliated.

33.5 Proposed accounting entries.

33.6 Form of notice.

33.7 Verification.

33.8 Number of copies.

33.9 Protective order.

33.10 Additional information requests by

the Commission.

Authority: 16 U.S.C. 791a–825r, 2601–

2645; 31 U.S.C. 9701; 42 U.S.C. 7101–7352.

§ 33.1 Applicability.

The requirements of this part will

apply to public utilities seeking

authority for any transaction requiring

Commission authorization under

section 203 of the Federal Power Act.

§ 33.2 Contents of application—general

information requirements.

Each applicant shall include in its

application, in the manner and form and

in the order indicated, the following

general information with respect to such

applicant and each entity whose

jurisdictional facilities or securities are

involved:

(a) The exact name of the applicant

and its principal business address.

(b) The name and address of the

person authorized to receive notices and

communications regarding the

application, including phone and fax

numbers, and E-mail address.

(c) A description of the applicant,

including:

(1) All business activities of the

applicant, including authorizations by

charter or regulatory approval, even if

not currently engaged in such activity;

(2) Organizational charts depicting the

applicant’s current and proposed posttransaction corporate structures

(including any pending authorized but

not implemented changes) indicating all

parent companies, subsidiaries,

affiliates and associate companies,

unless the applicant demonstrates that

the proposed transaction does not affect

the corporate structure of any party to

the transaction;

(3) A description of all joint ventures,

strategic alliances, or other business

arrangements to which the applicant or

its parent companies, subsidiaries,

affiliates and associate companies is a

party, unless the applicant demonstrates

that the proposed transaction does not

affect any of its business interests;

(4) The identity of common officers or

directors of parties to the proposed

transaction;

(5) A description of any

authorizations, licenses, or other

approvals received from the

Commission; and

(6) A description and location of

wholesale power sales customers and

unbundled transmission services

customers served by the applicant or its

parent companies, subsidiaries,

affiliates and associate companies.

(d) A description of jurisdictional

facilities owned, operated, or controlled

by the applicant or its parent

companies, subsidiaries, affiliates, and

associate companies.

(e) A narrative description of the

proposed transaction for which

Commission authorization is requested,

including:

(1) The identity of all parties involved

in the transaction;

(2) All jurisdictional facilities and

securities associated with or affected by

the transaction;

(3) The consideration for the

transaction; and

(4) The effect of the transaction on

such jurisdictional facilities and

securities.

(f) All contracts related to the

proposed transaction together with

copies of all other written instruments

entered into or proposed to be entered

into by the parties to the transaction.

(g) A statement explaining the facts

relied upon to demonstrate that the

proposed transaction is consistent with

the public interest. The applicant must
20356 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

include a general explanation of the

effect of the transaction on:

(1) Competition;

(2) Rates; and

(3) Regulation of the applicant by the

Commission and state commissions

with jurisdiction over any party to the

transaction. The applicant should also

file any other information it believes

relevant to the Commission’s

consideration of the transaction.

(h) If the proposed transaction

involves physical property of any party,

the applicant must provide a general or

key map showing in different colors the

properties of each party to the

transaction.

(i) If the applicant is required to

obtain licenses, orders, or other

approvals from other regulatory bodies

in connection with the proposed

transaction, the applicant must identify

the regulatory bodies and indicate the

status of other regulatory actions, and

provide a copy of each order of those

regulatory bodies that relates to the

proposed transaction.

§ 33.3 Additional information requirements

for applications resulting in a single

corporate entity obtaining ownership or

control over generating facilities of

unaffiliated parties.

(a) If, as a result of the proposed

transaction, a single corporate entity

obtains ownership or control over the

generating facilities of two or more of

the previously unaffiliated parties to the

transaction or their parent companies,

subsidiaries, affiliates and associate

companies (collectively merging

entities), the applicant must file the

horizontal Competitive Screen Analysis

described in paragraphs (b), (c), (d), (e)

and (f) of this section, unless the

applicant affirmatively demonstrates

that:

(1) The merging entities do not

conduct business in the same

geographic markets or

(2) The extent of the business

transactions in the same geographic

markets is de minimis.

(b) All data, assumptions, techniques

and conclusions in the horizontal

Competitive Screen Analysis must be

accompanied by appropriate

documentation and support.

(1) If the applicant is unable to

provide any specific data required for

this section, it must identify and explain

how the requested data submission was

satisfied and the suitability of the

substitute data.

(2) The applicant may provide other

analyses in addition to the horizontal

Competitive Screen Analysis.

(3) The applicant may use a computer

model to complete one or more steps in

the horizontal Competitive Screen

Analysis. The applicant must fully

explain, justify and document any

model used and provide descriptions of

model formulation, mathematical

specifications, solution algorithms, as

well as the annotated model code, and

any software needed to execute the

model. The applicant must explain and

document how inputs were developed,

the assumptions underlying such inputs

and any adjustments made to published

data that are used as inputs. The

applicant must also explain how it

tested the predictive value of the model,

for example, using historical data.

(c) The horizontal Competitive Screen

Analysis must be completed using the

following steps:

(1) Define relevant products. Identify

and define all wholesale electricity

products sold by the merging entities

during the two years prior to the date of

the merger application, including but

not limited to: non-firm energy, shortterm capacity (or firm energy), and longterm capacity (a contractual

commitment of more than one year). If

supply and demand conditions for a

product vary substantially between time

periods, those periods must be

identified by time of day and/or load

level, and analyzed separately.

(2) Identify destination markets.

Identify each wholesale power sales

customer or set of customers

(destination market) affected by the

proposed transaction. Affected

customers are, at a minimum, those

entities directly interconnected to any of

the merging entities. Affected customers

also should include those entities that

have purchased electricity at wholesale

from any of the merging entities during

the two years prior to the date of the

application. If the applicant does not

identify an entity to whom the merging

entities have sold electricity during the

last two years as an affected customer,

the applicant must provide a full

explanation for each such exclusion.

(3) Identify potential suppliers. A

seller may be included in a geographic

market to the extent that it can

economically and physically deliver

generation services to the destination

market. The applicant must identify

potential suppliers to each destination

market using the delivered price test.

(i) Delivered price test. For each

destination market, the applicant must

calculate the amount of relevant product

a potential supplier could deliver to the

destination market from owned or

controlled capacity at a price, including

applicable transmission and ancillary

services costs, that is no more than five

(5) percent above the pre-transaction

market clearing price in the destination

market.

(ii) The applicant must measure each

potential supplier’s presence in the

destination market in terms of

generating capacity, using at least

economic capacity and available

economic capacity measures. Additional

measures, such as total capacity, may be

presented.

(A) Economic capacity means the

amount of generating capacity owned or

controlled by a potential supplier with

variable costs low enough that energy

from such capacity could be

economically delivered to the

destination market. Prior to applying the

delivered price test, the generating

capacity meeting this definition must be

adjusted by subtracting capacity that is

committed under long-term firm sales

contracts and adding capacity that is

acquired under long-term firm purchase

contracts (i.e., contracts with a

remaining commitment of more than

one year). In addition, any generating

capacity of the potential supplier that is

under the operational control of a thirdparty must be attributed to the party for

whose economic benefit the capacity is

operated; generating capacity may also

be attributed to another supplier for

other reasons deemed necessary, but the

applicant must explain the reasons for

doing so.

(B) Available economic capacity

means the amount of generating

capacity meeting the definition of

economic capacity less the amount of

generating capacity needed to serve the

potential supplier’s native load, i.e., the

capacity needed to serve wholesale and

retail power customers on whose behalf

the potential supplier, by statute,

franchise, regulatory requirement, or

contract, has undertaken an obligation

to construct and operate its system to

meet their reliable electricity needs.

(C) Each potential supplier’s

economic capacity and available

economic capacity (and any other

measure used to determine the amount

of relevant product that could be

delivered to a destination market) must

be adjusted to reflect available

transmission capability to deliver each

relevant product. The allocation to a

potential supplier of limited capability

of constrained transmission paths

internal to the merging entities’ systems

or interconnecting the systems with

other control areas must recognize both

the transmission capability not subject

to firm reservations by others and any

firm transmission rights held by the

potential supplier that are not

committed to long-term transactions.

For each such instance where limited

transmission capability must be
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20357

allocated among potential suppliers, the

applicant must explain the method used

and show the results of such allocation.

If the proposed transaction would

cause an interface that interconnects the

transmission systems of the merging

entities to become transmission

facilities for which the merging entities

would have a native load priority under

their open access transmission tariff for

use of those facilities, all of the

unreserved capability of the interface

must be allocated to the merging entities

for purposes of the horizontal

Competitive Screen Analysis, unless the

applicant demonstrates one of the

following: the merging entities would

not have adequate economic capacity to

fully use such unreserved transmission

capability; the merging entities have

committed a portion of the interface

capability to third parties; or suppliers

other than the merging entities have

purchased a portion of the interface

capability.

(4) Calculate market concentration.

Using the amounts of generating

capacity (i.e., economic capacity and

available economic capacity, and any

other relevant measure) determined in

paragraph (c)(3) of this section, for each

product in each destination market, the

applicant must calculate the market

share, both pre-and post-merger, for

each potential supplier, the HerfindahlHirschman Index (HHI) statistic for the

market, and the change in the HHI

statistic. (The HHI statistic, which is a

measure of market concentration and is

a function of the number of firms in a

market and their respective market

shares, is calculated by summing the

squares of the individual market shares,

expressed as percentages, of all

potential suppliers to the destination

market.)

(5) Historical transaction data. To

corroborate the results of the horizontal

Competitive Screen Analysis, the

applicant must provide historical trade

data and historical transmission data.

Such data should cover the two-year

period preceding the filing of the

application. The applicant may adjust

the results of the horizontal Competitive

Screen Analysis, if supported by

historical trade data or historical

transmission service data. Any adjusted

results must be shown separately

together with an explanation of all

adjustments to the results of the

horizontal Competitive Screen Analysis.

(d) Data to support the delivered price

test. In support of the delivered price

test required by paragraph (c)(3) of this

section, the applicant must provide the

following data and information used in

calculating the economic capacity and

available economic capacity that a

potential supplier could deliver to a

destination market. The transmission

data required by paragraphs (d)(6)

through (d)(8) of this section must be

supplied for the merging entities’

systems. Such transmission data must

also be supplied for other relevant

systems, to the extent data are publicly

available.

(1) Generation capacity and variable

cost. For each generating plant or unit

owned or controlled by each potential

supplier, the applicant must provide:

supplier name; name of the plant or

unit; primary and secondary fuel-types;

nameplate capacity; summer and winter

total capacity; summer and winter

capacity adjusted to reflect planned and

forced outages and other factors, such as

fuel supply and environmental

restrictions; and variable cost

components, including, at a minimum,

variable operation and maintenance,

including both fuel and non-fuel

operation and maintenance, and

environmental compliance. To the

extent costs are allocated among units at

the same plant, allocation methods must

be fully described.

(2) Long-term purchase and sales data.

For each sale and purchase of capacity,

the applicant must provide the

following information: purchasing

entity name; selling entity name;

duration of the contract; provisions

regarding renewal of the contract;

priority or degree of interruptibility;

FERC rate schedule number, if

applicable; and quantity and price of

capacity and/or energy purchased or

sold under the contract.

(3) Native load commitments (i.e.,

commitments to serve wholesale and

retail power customers on whose behalf

the potential supplier, by statute,

franchise, regulatory requirement, or

contract, has undertaken an obligation

to construct and operate its system to

meet their reliable electricity needs). For

each time period, if time-differentiated

relevant products are analyzed, the

applicant must provide: supplier name

and hourly native load obligations for

the most recent two years. If data on

native load obligations are not available,

the applicant must fully explain and

justify any estimates of native load

obligations.

(4) Transmission and ancillary service

prices, and loss factors. The applicant

must use in the horizontal Competitive

Screen Analysis the maximum rates

stated in the transmission providers’

tariffs. If necessary, those rates should

be converted to a dollars-per-megawatt

hour basis and the conversion method

explained. If a regional transmission

pricing regime is in effect that departs

from system-specific transmission rates,

the analysis should reflect the regional

pricing regime. The following data must

be provided for each transmission

system that would be used to deliver

energy from each potential supplier to a

destination market: supplier name;

name of transmission system; firm

point-to-point rate for each system; nonfirm point-to-point rate; scheduling,

system control and dispatch rate;

reactive power/voltage control rate; and

transmission loss factor.

(5) Destination market price. The

applicant must provide, for each

relevant product and destination

market, market prices for the time

periods corresponding to the timedifferentiated products being analyzed

for the most recent two years. The

applicant may provide suitable proxies

for market clearing prices if actual

market prices are unavailable. Estimated

prices must be supported and the cost

or sales data used to estimate the prices

must be included with the application.

(6) Transmission capability. The

applicant must provide transfer

capability data for each of the

transmission paths, interfaces, or other

facilities used by suppliers to deliver to

the destination markets on an hourly

basis for the most recent two years. The

applicant must report simultaneous

transfer capability, if it is available.

Transmission capability data must

include the following information:

transmission path, interface, or facility

name; total transfer capability (TTC);

and firm available transmission

capability (ATC).

(7) Transmission constraints. For each

existing transmission facility that affects

supplies to the destination markets and

that has been constrained during the

most recent two years or is expected to

be constrained within the planning

horizon, the applicant must provide the

following information: name of all

paths, interfaces, or facilities affected by

the constraint; locations of the

constraint and all paths, interfaces, or

facilities affected by the constraint;

hours of the year when the transmission

constraint is binding; and the system

conditions under which the constraint

is binding. The applicant must include

information regarding expected changes

in loadings on transmission facilities

due to the proposed transaction and the

consequent effect on transfer capability.

To the extent possible, the applicant

should provide system maps showing

the location of transmission facilities

where binding constraints have been

known or are expected to occur.

(8) Firm transmission rights. For each

potential supplier to a destination

market that holds firm transmission

rights on a transmission path, interface,
20358 Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules

or facility necessary to deliver energy

from a potential supplier (including the

supplier itself) to that market, the

applicant must provide the following

information: supplier name; name of

transmission path interface, or facility;

the FERC rate schedule number, if

applicable, under which transmission

service is provided; and a description of

the firm transmission rights held

(including, at a minimum, quantity and

remaining time the rights will be held,

and any relevant time restrictions on

transmission use, such as peak or offpeak rights).

(9) Summary of potential suppliers’

presence. The applicant must provide a

summary table with the following

information for each potential supplier

for each destination market: potential

supplier name; the supplier’s total

amount of economic capacity (not

subject to transmission constraints); and

the supplier’s amount of economic

capacity from which energy can be

delivered to the destination market

(after adjusting for transmission

availability). A similar table must be

provided for available economic

capacity, and for any other generating

capacity measure used by the applicant.

(10) Historical trade data. The

applicant must provide data identifying

all of the merging entities’ wholesale

sales and purchases of electric energy

for the most recent two years. For each

transaction, the applicant must include

the following information: type of

transaction (such as non-firm, shortterm firm, long-term firm, peak, offpeak, etc.); name of purchaser; name of

seller; date; duration and time period of

the transaction; quantity of energy

purchased or sold; energy charge per

unit; megawatthours purchased or sold;

price; and the delivery points used to

effect the sale or purchase.

(11) Historical transmission data. The

applicant must provide information

concerning any transmission service

denials, interruptions and curtailments

on the merging entities’ systems, for the

most recent two years, to the extent the

information is available from OASIS

data, including the following

information: name of the customer

denied, interrupted or curtailed; type,

quantity and duration of service at

issue; the date and period of time

involved; reason given for the denial,

interruption or curtailment; the

transmission path; and the reservations

or other use anticipated on the affected

transmission path at the time of the

service denial, curtailment or

interruption.

(e) Any remedies proposed by the

applicant (including, for example,

divestiture or participation in an

independent system operator) which are

intended to mitigate the adverse effect

of the proposed transaction must, to the

extent possible, be factored into the

horizontal Competitive Screen Analysis

as an additional post-transaction

analysis. Any mitigation commitments

that involve facilities (e.g., in

connection with divestiture of

generation) must specify which facilities

are affected by the commitment.

(f) Additional factors. If the applicant

does not propose mitigation measures

and does not otherwise demonstrate that

the proposed transaction will not

adversely affect competition, the

applicant must address: the potential for

entry in the market and the role that

entry could play in mitigating adverse

competitive effects of the transaction;

the efficiency gains that reasonably

could not be achieved by other means;

and whether, but for the transaction,

one or more of the merging entities

would be likely to fail, causing its assets

to exit the market.

§ 33.4 Additional information requirements

for applications resulting in a single

corporate entity obtaining ownership or

control over businesses that provide inputs

to electric generation and electric

generation products that were previously

unaffiliated.

(a) If, as a result of the proposed

transaction, a single corporate entity

obtains ownership or control over a

party to the transaction or its parent

companies, subsidiaries, affiliates and

associate companies that provides

inputs to electric generation and another

party to the transaction or its parent

companies, subsidiaries, affiliates and

associate companies that currently is

unaffiliated with the party that provides

inputs to electric generations and that

provides electric generation products,

the applicant must file the vertical

Competitive Screen Analysis described

in paragraphs (b), (c), (d) and (e) of this

section, unless the applicant

affirmatively demonstrates that the

parties do not provide inputs to the

generation of electric energy and electric

generating capacity products in the

same geographic markets or the extent

of the inputs to the generation of electric

energy (i.e., upstream relevant products)

provided by the party to potential

suppliers of electric generating capacity

products (i.e., the downstream relevant

products) to the relevant destination

markets, as defined in paragraph (c)(2)

of § 33.3, is de minimis.

(b) All data, assumptions, techniques

and conclusions in the vertical

Competitive Screen Analysis must be

accompanied by appropriate

documentation and support.

(c) The vertical Competitive Screen

Analysis must be completed using the

following steps:

(1) Define relevant products.

(i) Downstream relevant products.

Consistent with paragraph (c)(1) of

§ 33.3, the applicant must identify and

define all relevant products sold by a

party to the transaction or its parent

companies, subsidiaries, affiliates, and

associate companies in relevant

downstream geographic markets.

(ii) Upstream relevant products. The

applicant must identify and define all

relevant inputs to the generation of

electricity provided by an upstream

business of any of the parties to the

transaction or its parent companies,

subsidiaries, affiliates and associate

companies in the most recent two years.

(2) Define geographic markets.

(i) Downstream geographic markets.

Consistent with paragraphs (c)(2) and

(c)(3) of § 33.3, the applicant must

identify all geographic markets in which

it or its parent companies, subsidiaries,

affiliates and associate companies sells

the downstream relevant products

identified in paragraph (c)(1)(i) of this

section.

(ii) Upstream geographic markets. The

applicant must identify all geographic

markets in which it or its parent

companies, subsidiaries, affiliates and

associate companies provides the

upstream relevant products identified in

paragraph (c)(1)(ii) of this section.

(3) Analyze competitive conditions.

(i) Downstream geographic market.

The applicant must compute market

share for each supplier in each relevant

downstream geographic market and the

HHI statistic for the downstream market.

The applicant must provide a summary

table with the following information for

each relevant downstream geographic

market: the economic capacity of each

downstream supplier (specify the

amount of such capacity served by each

upstream supplier); the total amount of

economic capacity in the downstream

market served by each upstream

supplier; the market share of economic

capacity served by each upstream

supplier; and the HHI statistic for the

downstream market. A similar table

must be provided for available

economic capacity and for any other

measure used by the applicant.

(ii) Upstream geographic market. The

applicant must provide a summary table

with the following information for each

upstream relevant product in each

relevant upstream geographic market:

the amount of relevant product

provided by each upstream supplier; the

total amount of relevant product in the

market; the market share of each
Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Proposed Rules 20359

upstream supplier; and the HHI statistic

for the upstream market.

(d) Any remedies proposed by the

applicant (including, for example,

divestiture or participation in an

independent system operator) which are

intended to mitigate the adverse effect

of the proposed transaction must, to the

extent possible, be factored into the

vertical Competitive Screen Analysis as

an additional post-transaction analysis.

Any mitigation commitments that

involve facilities must specify which

facilities are affected by the

commitment.

(e) Additional factors. If the applicant

does not propose mitigation measures

and does not otherwise demonstrate that

the proposed transaction will not

adversely affect competition, the

applicant must address: the potential for

entry in the market and the role that

entry could play in mitigating adverse

competitive effects of the transaction;

the efficiency gains that reasonably

could not be achieved by other means;

and whether, but for the transaction,

one or more of the parties to the

transaction would be likely to fail,

causing its assets to exit the market. The

applicant must address each of the

additional factors in the context of

whether the proposed transaction is

likely to present concerns about raising

rivals’ costs or anticompetitive

coordination.

§ 33.5 Proposed accounting entries.

If the applicant is required to

maintain its books of account in

accordance with the Commission’s

Uniform System of Accounts (part 101

of this chapter), the applicant must

present proposed accounting entries

showing the effect of the transaction

with sufficient detail to indicate the

effects on all account balances

(including amounts transferred on an

interim basis), the effect on the income

statement, and the effects on other

relevant financial statements. The

applicant must also explain how the

amount of each entry was determined.

§ 33.6 Form of notice.

The applicant must file a form of

notice of the application suitable for

issuance in the Federal Register, as well

as a copy of the same notice in

electronic format in WordPerfect 6.1 (or

other electronic format the Commission

may designate) on a 31⁄2′′ diskette

marked with the name of the applicant

and the words ‘‘Notice of Application.’’

The Commission may require the

applicant to give such local notice by

publication as the Commission in its

discretion may deem proper.

§ 33.7 Verification.

The original application shall be

signed by a person or persons having

authority with respect thereto and

having knowledge of the matters therein

set forth, and shall be verified under

oath.

§ 33.8 Number of copies.

An original and five copies of

application under this part shall be

submitted. If the applicant must submit

information specified in paragraphs (b),

(c), (d), (e) and (f) of § 33.3 or paragraphs

(b), (c), (d) and (e) of § 33.4, the

applicant must submit all such

information in electronic format along

with a printed description and

summary. The electronic version of all

text documents shall be submitted in

WordPerfect Version 6.1, and the

electronic version of all spreadsheet

documents shall be submitted in either

Lotus, QuattroPro Version 6.0 or

Microsoft Excel Version 4.0 (or other

electronic format the Commission may

designate). The printed portion of the

applicant’s submission must include

documentation for the electronic

submission, including all file names and

a summary of the data contained in each

file. Each column (or data item) in each

separate data table or chart must be

clearly labeled in accordance with the

requirements of § 33.3 and § 33.4. Any

units of measurement associated with

numeric entries must also be included.

§ 33.9 Protective order.

If the applicant seeks to protect any

portion of the application, or any

attachment thereto, from public

disclosure pursuant to § 388.112 of this

chapter of the Commission’s

regulations, the applicant must include

with its request for privileged treatment

a proposed protective order under

which the parties to the proceeding will

be able to review any of the data,

information, analysis or other

documentation relied upon by the

applicant for which privileged treatment

is sought.

§ 33.10 Additional information requests by

the Commission.

The Director of the Office of Electric

Power Regulation, or his designee, may,

by letter, require the applicant to submit

additional information as is needed for

Commission analysis of an application

filed under this part.

[FR Doc. 98–10686 Filed 4–23–98; 8:45 am]

BILLING CODE 6717–01–P

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[CT18–1–7204b; A–1–FRL–5999–3]

Approval and Promulgation of Air

Quality Implementation Plans;

Connecticut; Alternative Reasonably

Available Control Technology for

Volatile Organic Compounds at Risdon

Corporation in Danbury

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: EPA is proposing to approve

a State Implementation Plan (SIP)

revision submitted by the State of

Connecticut. This revision allows an

alternative reasonably available control

technology (RACT) determination for

volatile organic compound (VOC)

emissions at Risdon Corporation’s

Danbury facility which are subject to

Connecticut’s miscellaneous metal parts

and products VOC RACT regulations. In

the Final Rules Section of this Federal

Register, EPA is approving the State’s

SIP revision as a direct final rule

without prior proposal because the

Agency views this as a noncontroversial

revision amendment and anticipates no

adverse comments. A detailed rationale

for the approval is set forth in the direct

final rule. If no relevant adverse

comments are received in response to

that direct final rule, no further activity

is contemplated in relation to this

proposed rule. If EPA receives relevant

adverse comments, the direct final rule

will be withdrawn and all public

comments received will be addressed in

a subsequent final rule based on this

proposed rule. EPA will not institute a

second comment period on this

proposal. Any parties interested in

commenting on this proposal should do

so at this time.

DATES: Comments must be received on

or before May 26, 1998.

ADDRESSES: Comments may be mailed to

Susan Studlien, Deputy Director, Office

of Ecosystem Protection (mail code

CAA), U.S. Environmental Protection

Agency, Region I, JFK Federal Bldg.,

Boston, MA 02203. Copies of the State

submittal and EPA’s technical support

document are available for public

inspection during normal business

hours, by appointment at the Office of

Ecosystem Protection, U.S.

Environmental Protection Agency,

Region I, One Congress Street, 11th

floor, Boston, MA and, the Bureau of Air

Management, Department of

Environmental Protection, State Office