Document ID: FERC-2016-1314-0001
Agency: ferc
Document Type: Notice
Title: Commission Requirements for Review: Transactions under Section 203 of the FederalPower Act and Market-Based Rate Applications under Section 205 of the Federal Power Act
Posted Date: 2016-09-28T04:00Z

[Federal Register Volume 81, Number 188 (Wednesday, September 28, 2016)]
[Notices]
[Pages 66649-66656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23443]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM16-21-000]

Modifications to Commission Requirements for Review of 
Transactions Under Section 203 of the Federal Power Act and Market-
Based Rate Applications Under Section 205 of the Federal Power Act

AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Notice of inquiry.

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SUMMARY: In this Notice of Inquiry, the Federal Energy Regulatory 
Commission (Commission) seeks to explore whether, and if so, how, the 
Commission should revise its current approach to identifying and 
assessing market power in the context of transactions under section 203 
of the Federal Power Act (FPA) and applications under section 205 of 
the FPA for market-based rate authority for wholesale sales of electric 
energy, capacity and ancillary services by public utilities. In 
addition, the Commission seeks comment related to its scope of review 
under section 203 of the FPA, including revisions to blanket 
authorizations.

DATES: Comments are due November 28, 2016.

ADDRESSES: Comments, identified by docket number, may be filed in the 
following ways:
     Electronic Filing through http://www.ferc.gov. Documents 
created electronically using word processing software should be filed 
in native applications or print-to-PDF format and not in a scanned 
format.
     Mail/Hand Delivery: Those unable to file electronically 
may mail or hand-deliver comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE., 
Washington, DC 20426.
    Instructions: For detailed instructions on submitting comments and 
additional information on the rulemaking process, see the Comment 
Procedures Section of this document.

FOR FURTHER INFORMATION CONTACT: 

Melissa Nimit (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street NE., Washington, 
DC 20426 (202) 502-6638
Amery Por[eacute] (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street NE., 
Washington, DC 20426 (202) 502-6312

SUPPLEMENTARY INFORMATION: 
    1. In this Notice of Inquiry (NOI), the Commission seeks to explore 
whether, and if so, how, the Commission should revise its current 
approach to identifying and assessing market power in the context of 
transactions under section 203 of the Federal Power Act (FPA) \1\ and 
applications under section 205 of the FPA \2\ for market-based rate 
authority for wholesale sales of electric energy, capacity and 
ancillary services by public utilities. In addition, the Commission 
seeks comment related to its scope of review under section 203 of the 
FPA, including revisions to blanket authorizations. Of particular 
interest is whether the Commission should: (1) Establish a simplified 
analysis for certain section 203 transactions that are unlikely to 
raise market power concerns; (2) add a supply curve analysis to section 
203 evaluations; (3) improve the Commission's single pivotal supplier 
analysis in reviewing market-based rate applications, and add a similar 
pivotal supplier analysis to section 203 evaluations; (4) add a market 
share analysis to review of section 203 transactions; (5) modify how 
capacity associated with long-term power purchase agreements (PPAs) 
should be attributed in section 203 transactions; and (6) require 
submission of applicant merger-related documents. In addition, the 
Commission seeks comment related to its scope of review under section 
203, including whether there are existing blanket authorizations that 
may be overly broad or otherwise no longer appropriate, and whether 
there are classes of transactions for which further blanket 
authorizations or form of expedited review would be appropriate.
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    \1\ 16 U.S.C. 824b.
    \2\ 16 U.S.C. 824d.
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I. Background

A. Section 203

    2. Section 203(a)(4) of the FPA requires the Commission to approve 
a proposed disposition, consolidation, acquisition, or change in 
control if it finds that the proposed transaction will be consistent 
with the public interest.\3\ The Commission's analysis of whether a 
proposed transaction is consistent with the public interest generally 
involves consideration of three factors: (1) The effect on competition; 
(2) the effect on rates; and (3) the effect on regulation.\4\

[[Page 66650]]

The Energy Policy Act of 2005 added the requirement that the Commission 
find that the proposed transaction ``will not result in cross-
subsidization of a non-utility associate company or the pledge or 
encumbrance of utility assets for the benefit of an associate company, 
unless the Commission determines that the cross-subsidization, pledge, 
or encumbrance will be consistent with the public interest.'' \5\
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    \3\ 16 U.S.C. 824b(a)(4).
    \4\ Inquiry Concerning the Commission's Merger Policy Under the 
Federal Power Act: Policy Statement, Order No. 592, FERC Stats. & 
Regs. ] 31,044 (1996) (1996 Merger Policy Statement), 
reconsideration denied, Order No. 592-A, 79 FERC ] 61,321 (1997). 
See also FPA Section 203 Supplemental Policy Statement, FERC Stats. 
& Regs. ] 31,253 (2007), order on clarification and reconsideration, 
122 FERC ] 61,157 (2008).
    \5\ Energy Policy Act of 2005, Public Law 109-58, 1289, 119 
Stat. 594, 982-83 (2005) (EPAct 2005).
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    3. To analyze whether a proposed transaction will have an adverse 
effect on competition, the Commission adopted the 1992 Department of 
Justice (DOJ) and Federal Trade Commission (FTC) Horizontal Merger 
Guidelines (1992 Guidelines) \6\ and its five-step framework,\7\ as 
well as an analytic screen (Competitive Analysis Screen), based on the 
1992 Guidelines, to identify transactions that would not harm 
competition.\8\ The components of the Competitive Analysis Screen are 
as follows: (1) Identify the relevant products; (2) for the purpose of 
determining the size of the geographic market, identify customers who 
may be affected by the merger; (3) for the purpose of determining the 
size of the geographic market, identify potential suppliers to each 
identified customer (which includes a delivered price test analysis, 
consideration of transmission capability, and a check against actual 
trade data); and (4) analyze market concentration using the Herfindahl-
Hirschman Index (HHI) thresholds from the 1992 Guidelines.\9\
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    \6\ 1992 Horizontal Merger Guidelines, 57 FR 41552 (Apr. 2, 
1992) (1992 Guidelines).
    \7\ 1996 Merger Policy Statement, FERC Stats. & Regs. ] 31,044 
at 30,118. The five steps are: (1) Defining the markets; (2) 
evaluating whether the extent of concentration of the market raise 
concerns about potential adverse competitive effects; (3) assessing 
whether entry could counteract such concerns; (4) assessing any 
efficiency gains that cannot otherwise be gauged; and (5) assessing 
whether either party to the merger would fail without the merger, 
causing its assets to exit the market.
    \8\ We note that in 2010, the DOJ and FTC again issued 
Horizontal Merger Guidelines (2010 Guidelines), which replaced the 
1992 Guidelines and explained several changes to the analysis set 
forth in the 1992 Guidelines. Specifically, among other things, the 
2010 Guidelines (1) raise the HHI thresholds used to classify a 
market as unconcentrated, moderately concentrated, or highly 
concentrated; and (2) place less emphasis on market definition and 
the use of a prescribed formula for considering the effects of a 
merger. The Commission sought comment on whether the Commission 
should revise its approach for examining horizontal market power 
when analyzing proposed mergers or other transactions under section 
203 of the FPA and when analyzing market-based rate filings under 
section 205 of the FPA to reflect the 2010 Guidelines. However, the 
Commission ultimately decided to retain its existing approaches to 
analyzing horizontal market power under section 203 of the FPA and 
in its analysis of electric market-based rates under section 205 of 
the FPA. Analysis of Horizontal Market Power under the Federal Power 
Act, 138 FERC ] 61,109 (2012).
    \9\ Id. at 30,119-20, 30,128-37. Specifically, the 1992 
Guidelines address three ranges of market concentration: (1) An 
unconcentrated post-merger market--if the post-merger HHI is below 
1000, regardless of the change in HHI the merger is unlikely to have 
adverse competitive effects; (2) a moderately concentrated post-
merger market--if the post-merger HHI ranges from 1000 to 1800 and 
the change in HHI is greater than 100, the merger potentially raises 
significant competitive concerns; and (3) a highly concentrated 
post-merger market--if the post-merger HHI exceeds 1800 and the 
change in the HHI exceeds 50, the merger potentially raises 
significant competitive concerns; if the change in HHI exceeds 100, 
it is presumed that the merger is likely to create or enhance market 
power.
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    4. There are two ways that an applicant may demonstrate that the 
proposed transaction will not have an adverse effect on competition. 
First, the applicant may explain how the transaction does not result in 
any increase in the amount of generation capacity owned or controlled 
collectively by it and its affiliates in the relevant geographic 
markets.\10\ Second, an applicant may explain how the transaction 
results in a de minimis change in its market power.\11\ An applicant 
that is not able to rely on either of the above is required to submit a 
Competitive Analysis Screen, which includes a delivered price test.\12\
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    \10\ 18 CFR 33.3(a)(2).
    \11\ Id.
    \12\ 18 CFR 33.3(a)(1).
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    5. Although the Commission's regulations require applicants to 
``[i]dentify and define all wholesale electricity products sold by the 
merging entities during the two years prior to the date of the 
application, including, but not limited to, non-firm energy, short-term 
capacity (or firm energy), long-term capacity (a contractual commitment 
of more than one year), and ancillary services (specifically spinning 
reserves, non-spinning reserves, and imbalance energy, identified and 
defined separately),'' \13\ the delivered price tests analyses filed 
with the Commission often focus on only the short-term energy market, 
with far less detail and attention given to the other relevant 
products.
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    \13\ 18 CFR 33.3(c)(1).
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    6. The delivered price test primarily determines the scope, or 
size, of the relevant geographic market by identifying potential 
suppliers, incorporating transmission availability and prices, and 
determining the effects of a transaction on concentration.\14\ The 
Commission first adopted the delivered price test in 1996 for section 
203 filings as part of its response to ``dramatic and continuing 
changes in the electric power industry'' to ``ensure that future 
mergers are consistent with the competitive goals of the Energy Policy 
Act of 1992 (EPAct).'' \15\ Subsequent case law and policy statements 
have provided further guidance but have not materially modified the 
delivered price test.
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    \14\ See 1996 Merger Policy Statement, FERC Stats. & Regs. ] 
31,044 at 30,118-19.
    \15\ Id. at 30,110-11.
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B. Section 205

    7. Section 205 of the FPA requires that all rates charged by public 
utilities for the interstate transmission or sale of electric energy be 
just and reasonable and not unduly discriminatory or preferential.\16\ 
The Commission allows sales of electric energy, capacity, and ancillary 
services at market-based rates if the applicant and its affiliates show 
that they do not have, or have adequately mitigated, horizontal and 
vertical market power.\17\ The Commission adopted two indicative 
screens, the wholesale market share screen and the pivotal supplier 
screen, for purposes of determining whether a seller may be granted 
market-based rate authority.
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    \16\ 16 U.S.C. 824d(a).
    \17\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
FERC Stats. & Regs. ] 31,252, at PP 1, 4, clarified, 121 FERC ] 
61,260 (2007), order on reh'g, Order No. 697-A, FERC Stats. & Regs. 
] 31,268, clarified, 124 FERC ] 61,055, order on reh'g, Order No. 
697-B, FERC Stats. & Regs. ] 31,285 (2008), order on reh'g, Order 
No. 697-C, FERC Stats. & Regs. ] 31,291 (2009), order on reh'g, 
Order No. 697-D, FERC Stats. & Regs. ] 31,305 (2010), aff'd sub nom. 
Montana Consumer Counsel v. FERC, 659 F.3d 910 (9th Cir. 2011), 
cert. denied, 133 S. Ct. 26 (2012).
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    8. The wholesale market share screen measures whether a seller has 
a dominant position in the market by analyzing the number of megawatts 
(MW) of uncommitted capacity it owns or controls, relative to the 
uncommitted capacity of the entire market.\18\ A seller whose share of 
the relevant market is less than 20 percent during all seasons passes 
the market share screen.\19\ The Commission stated that the use of such 
a conservative threshold at the indicative screen stage of a proceeding 
is warranted because the indicative screens are meant to identify those 
sellers that raise no horizontal market power concerns, as well as 
those that

[[Page 66651]]

require further examination.\20\ The Commission reasoned that a 20 
percent threshold for the wholesale market share screen achieved the 
proper balance between identifying sellers that may present market 
power concerns, while avoiding the risk of ``false positives'' and 
imposing undue regulatory burdens on sellers.\21\
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    \18\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 43.
    \19\ Id. PP 43-44, 80, 89.
    \20\ Id. PP 13, 62. Sellers are allowed to use simplifying 
assumptions in preparing their indicative screens, such as not 
considering competing imports into the relevant market. 
Additionally, sellers may be excused from filing screens if, for 
instance, they represent that the full output of all of the capacity 
they and their affiliates own in the relevant market and all first-
tier markets is fully committed under long-term contracts to 
unaffiliated entities.
    \21\ Id. P 91.
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    9. The pivotal supplier screen evaluates the seller's potential to 
exercise market power based on the seller's uncommitted capacity at the 
time of annual peak demand in the relevant market.\22\ Sellers are 
required to identify the wholesale load, which is calculated by taking 
the difference between the annual peak load and the average of the 
daily native load peaks during the month in which the annual peak 
occurs. The pivotal supplier analysis deducts the wholesale load from 
the total uncommitted supply in the market to calculate the net 
uncommitted supply available to compete at wholesale. A seller 
satisfies the pivotal supplier screen if wholesale load is less than 
uncommitted capacity from the seller's competing suppliers in the 
relevant market (wholesale load can be served without any of the 
seller's capacity participating in the market).
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    \22\ Id. P 35.
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    10. With respect to sales of energy, capacity, energy imbalance 
service, generation imbalance service, and primary frequency response 
service, the Commission has established rebuttable presumptions that a 
seller lacks market power if the screens above are passed. In addition, 
there is a rebuttable presumption that a seller lacks market power in 
the provision of operating reserve services if the seller passes the 
above screens and makes an additional showing that the scheduling 
practices in its region supports the delivery of operating reserve 
resources from one balancing authority area to another. For each of 
these products, a seller is rebuttably presumed to have market power if 
it does not pass one of the screens.\23\
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    \23\ 18 CFR 35.37.
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II. Request for Comments

    11. As part of ensuring that the Commission meets its statutory 
obligations, the Commission, on occasion, engages in public inquiry to 
gauge whether there is a need to add, modify or eliminate certain 
requirements. Here, the Commission is interested in obtaining comment 
on harmonizing its analysis of transactions under section 203 and its 
market-based rate analysis under section 205, streamlining the process 
for certain applicants that submit section 203 filings, and obtaining 
additional information from applicants that may help better inform the 
Commission's analyses. Specifically, the Commission is undertaking a 
review of its approach to identifying and assessing market power in the 
context of both its review of transactions under section 203 and 
applications under section 205 for market-based rate authority and 
whether the Commission's analyses of market power under section 203 and 
of market-based rate applications are effective at identifying the 
potential for the exercise of market power, and if not, what 
improvements can be made. The Commission has identified several 
potential improvements in how it analyzes section 203 and market-based 
rate applications on which it seeks comment, which include harmonizing 
the Commission's analysis of transactions under section 203 and its 
market-based rate analysis under section 205, considering additional 
information in the Commission's market power analysis (such as a supply 
curve analysis, pivotal supplier analysis, market share analysis, and 
applicant merger-related documents), and potentially clarifying what 
would qualify as a de minimus transaction in section 203 filings. The 
Commission notes there are a number of areas where the Commission's 
section 203 and market-based rate market power analyses differ.\24\ 
Some of these differences are appropriate, but others may not be. Thus, 
in considering whether and how to implement any changes to the market 
power analyses in the Commission's review of section 203 transactions 
and market-based rate applications, the Commission is interested in 
whether increased harmonization of the two analyses is warranted and 
feasible. The Commission also seeks comment on whether several 
additional types of analyses that have not been required previously 
could aid the Commission's review of a proposed transaction.
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    \24\ For example, the Commission recently addressed the question 
of the appropriate analysis for ancillary services in the section 
205 market-based rate context, but did not make any corresponding 
finding in the section 203 context. Nonetheless, we seek comment 
broadly in this NOI. See Third-Party Provision of Ancillary 
Services; Accounting and Financial Reporting for Electric Storage 
Technologies, Order No. 784, FERC Stats. & Regs. ] 31,349 (2013), 
order on clarification, Order No. 784-A, 146 FERC ] 61,114 (2014).
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    12. As described below, the Commission seeks comment on whether, 
and if so, how, the Commission should revise its approach for examining 
horizontal market power in transactions under sections 203 and 205 for 
wholesale sales of electric energy, capacity and ancillary services by 
public utilities in six specific areas: (1) Whether, and if so, how, to 
more precisely define de minimis in the context of the section 203 
effect on competition prong and whether to develop a specific test for 
determining when a proposed transaction meets that definition such that 
a full Competitive Analysis Screen is unnecessary; (2) whether to add a 
requirement that applicants provide a supply curve analysis for their 
effect on competition demonstration under section 203; (3) whether 
there is a need for modifications to the Commission's existing pivotal 
supplier analysis in reviewing a market-based rate application and 
whether adding a pivotal supplier analysis to an applicant's effect on 
competition demonstration under section 203 would help detect market 
power issues; (4) whether adding a market share analysis to an 
applicant's effect on competition demonstration under section 203 would 
help detect market power issues; (5) whether to specify how capacity 
covered by a long-term firm PPA should be attributed in the section 203 
Competitive Analysis Screen; and (6) whether to adopt a requirement for 
section 203 applicants to submit certain merger-related documents. In 
addition, the Commission seeks comment on several additional questions 
regarding the section 203 analysis beyond market power issues related 
to its scope of review, including whether there are existing blanket 
authorizations under section 203 that may be overly-broad or otherwise 
no longer appropriate, and whether there are classes of transactions 
for which further blanket authorizations or form of expedited review 
would be appropriate.

A. Simplified De Minimis Analysis

    13. The Commission seeks comment on whether, and if so, how, to 
more precisely define de minimis in the context of reviewing a section 
203 application. The Commission seeks comment on whether a threshold is 
appropriate to determine whether a transaction's impact can be 
determined to be de minimis, and if so, how that threshold should be 
calculated.

[[Page 66652]]

    14. Commission regulations require a Competitive Analysis Screen, 
which includes a delivered price test, for section 203 applications 
that involve an impact on horizontal competition. A Competitive 
Analysis Screen is not needed if the applicant affirmatively 
demonstrates that the merging entities do not currently conduct 
business in the same geographic market or that the extent of business 
transactions among the merging entities in the same geographic market 
is de minimis, and no intervenor has alleged that one of the merging 
entities is a perceived potential competitor in the same geographic 
market as the other.\25\
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    \25\ 18 CFR 33.3(a).
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    15. The Commission has not defined de minimis nor identified a 
threshold that it would consider sufficient to meet this requirement, 
but has accepted various representations made by applicants regarding 
the issue. Applicants often make representations that their 
transaction's effect on horizontal competition is de minimis because 
their combined share of post-transaction installed capacity in the 
relevant geographic market will be relatively small. In other cases, 
applicants have claimed that their transaction's effect on horizontal 
competition is de minimis even where an applicant's post-transaction 
market share is large but the increase in an applicant's post-
transaction installed capacity is relatively small. Additionally, some 
applicants have provided a simplistic calculation to demonstrate the 
change in HHI, based on the installed capacity of the parties to the 
transaction compared to the market size, referred to as a ``2ab 
analysis.'' The ``2ab analysis'' is used to demonstrate that the 
overlap is de minimis and thus a delivered price test is not needed.
    16. In light of the various representations made by applicants 
regarding whether a proposed transaction's effect on horizontal 
competition is de minimis, the Commission seeks comment on whether it 
should establish a specific threshold to determine whether a 
transaction's impact can be determined to be de minimis and, if so, how 
that threshold should be calculated. The following are possible 
preliminary steps that a de minimis analysis could include to arrive at 
a market share: (1) Identify the default relevant geographic market as 
the balancing authority area (BAA) or regional transmission 
organization/independent system operator (RTO/ISO) market (or 
submarket, if known or appropriate); (2) identify the default product 
market as installed capacity, or identify the actual transactions in 
the relevant geographic market; and (3) calculate the existing (i.e., 
pre-transaction) market shares of the two transacting parties in the 
default relevant geographic market, where the results of that 
calculation would be measured against a specific threshold, such that 
if the product of the pre-transaction market shares is less than the 
threshold, the Commission would not require a full Competitive Analysis 
Screen. The Commission seeks comment both on this method as well as on 
alternative methods for determining whether a proposed transaction's 
effect on horizontal competition is de minimis, and on what an 
appropriate specific threshold may be.
    17. Further, as explained above, while some applicants have 
contended that their section 203 transaction would only have a de 
minimis effect on horizontal competition, applicants have also argued 
that they either do not need to provide a market power study or, 
alternatively, that the ``2ab analysis'' sufficiently demonstrates the 
transaction does not impact horizontal market power. The Commission 
seeks comments regarding whether the ``2ab analysis'' may lead to false 
results in situations where the proposed transaction is a partial 
acquisition of a competitor in the same market. The majority of section 
203 applications where the applicants' market presence overlaps are for 
partial acquisitions. In instances where both entities will continue to 
exist post-merger--albeit with different portfolios of assets--relying 
on the algebraically simple ``2ab analysis'' may be inappropriate 
because the resulting market shares of the post-transaction competitors 
have changed and therefore the squared market shares caused by the 
transaction do not produce the same mathematical result as when two 
firms merge.
    18. Thus, the Commission seeks comment on whether it should 
continue to accept the use of the current ``2ab analysis,'' whether the 
``2ab analysis'' is useful for some types of transactions but not 
others, or whether the Commission should develop an alternative 
abbreviated test to assess whether a transaction would result in an 
adverse effect on horizontal competition.

B. Serial De Minimis Mergers

    19. Serial acquisitions have the potential to result in an 
applicant with a larger market share incrementally acquiring additional 
capacity such that each proposed transaction individually would not 
require a full Competitive Analysis Screen, but taken as a whole would 
require a more in depth examination. That is, a particular entity could 
be a serial acquirer and amass market power from a number of small 
incremental transactions. As such, the Commission requests comment on 
whether it should incorporate consideration of incremental acquisitions 
into its competition analysis as well as into its analysis of whether a 
proposed transaction is de minimis. The Commission also seeks comment 
on alternative methods for determining how to address incremental 
acquisitions.\26\
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    \26\ Below, the Commission asks questions about whether it 
should be concerned about incremental acquisitions of generating 
capacity that cumulatively over time could lead to market power, but 
where no individual transaction raised a competitive concern. This 
concern is sometimes referred to as the ``serial merger theory.''
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C. Supply Curve Analysis

    20. The Commission also seeks comment on whether the existing 
section 203 horizontal market power analysis could be strengthened by 
incorporating a supply curve analysis. A supply curve analysis overlays 
a demand curve and a supply curve in order to assess whether a merged 
company has the ability and incentive to exercise market power by 
withholding output from marginal units (i.e., ability units) to raise 
prices in order to benefit its baseload units (i.e., incentive units) 
and increase its total profits.\27\ The supply curve is constructed 
using generation dispatch costs from the market.\28\ The ability to 
withhold output depends on the amount of marginal capacity that would 
be controlled by the merged firm, and the incentive to withhold output 
depends on the amount of inframarginal capacity that could benefit from 
higher prices. In contrast, the delivered price test examines aggregate 
MW of capacity in the relevant geographic area(s), not the structure of 
capacity (i.e., not the number of units in the baseload, intermediate, 
and peaking segments by ownership). A supply curve analysis can be used 
to calculate the responsiveness of prices to a reduction in supply for 
the market price calculated for each season/load, and establish a 
threshold that indicates the market may be subject to price movement 
through unilateral action. The results of this analysis could

[[Page 66653]]

indicate that an entity may have both the ability and incentive to 
raise the market price. In addition, a supply curve analysis would 
enable the Commission to identify situations that typical HHI analyses 
do not capture, including situations where mergers that result in 
changes in market concentration below the thresholds that merit further 
scrutiny from an HHI perspective may still have the ability and 
incentive to raise prices above competitive levels.
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    \27\ A supply curve analysis considers the relevant portion of 
the market supply curve elasticity for most hours of the year which 
provides information regarding applicants' incentive to withhold 
output. See, e.g., Commonwealth Edison Co., 91 FERC ] 61,036, at 
61,133 n.42 (2000).
    \28\ A properly constructed delivered price test incorporates 
the dispatch costs for the available generation in the market.
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    21. Currently, a supply curve analysis is not explicitly required 
by the Commission's regulations although it can be submitted by some 
applicants as alternative evidence.\29\ The Commission requests comment 
on whether requiring a supply curve analysis for each section 203 
application that must submit a Competitive Analysis Screen, in addition 
to current components of the Competitive Analysis Screen, would 
strengthen the horizontal market power analysis. If so, the Commission 
seeks comment as to what information it should require and what metrics 
it should evaluate, as part of such supply curve analysis.
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    \29\ In Order No. 642, the Commission clarified that applicants 
with screen failures could address market conditions beyond the 
change in HHI ``such as [with an analysis of] demand and supply 
elasticity, ease of entry and market rules, as well as technical 
conditions, such as the types of generation involved.'' Revised 
Filing Requirements Under Part 33 of the Commission's Regulations, 
Order No. 642, FERC Stats. & Regs. ] 31,111, at 31,897 (2000), order 
on reh'g, Order No. 642-A, 94 FERC ] 61,289 (2001).
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D. Pivotal Supplier Analysis

    22. The Commission uses a pivotal supplier analysis as an 
indicative screen and for the delivered price test aspect of its 
assessment of whether an applicant seeking market-based rate authority 
under FPA section 205 has market power. The Commission is interested in 
receiving comment on its current use of the pivotal supplier test in 
the context of market-based rates, whether adding a pivotal supplier 
test in the Commission's FPA section 203 analysis would provide 
valuable information to assess whether a party to the transaction is 
pivotal prior to the transaction, whether the transaction would render 
the party pivotal, and whether the degree to which a party to the 
transaction is pivotal is enhanced by the transaction.
    23. Specifically, the Commission requests comment on whether the 
current pivotal supplier analysis applied in market-based rate cases 
works effectively for purposes of analyzing market power and whether 
any improvements may be made to the current analysis. In particular, 
the Commission seeks comment on whether the wholesale load proxy is an 
effective metric in examining whether a supplier is pivotal in the 
study area. The wholesale load proxy used in the current pivotal 
supplier analysis uses the study area's annual peak load (i.e., needle 
peak) less the proxy for native load obligation (i.e., the average of 
the daily peak native load during the month in which the annual peak 
load day occurs).
    24. The Commission notes that, in practice, market-based rate 
sellers rarely fail the pivotal supplier screen. In many cases, the 
results of the pivotal supplier analysis indicate that the study area's 
wholesale load can be met solely by remote suppliers, a result that is 
unlikely in practice. Moreover, the Commission intended that the 
indicative screens would serve as a conservative threshold.\30\ 
However, with experience this does not seem to be the case. Thus, the 
Commission requests comment on whether modifying the existing pivotal 
supplier analysis by replacing the current wholesale load proxy with 
the study area's annual peak load (i.e., peak load not reduced by the 
proxy for native load obligation) would improve the accuracy and 
usefulness of the indicative screen and whether such a modification 
would result in a more realistic analysis of whether a supplier is 
pivotal. The Commission welcomes additional comments on the use of and 
modifications to pivotal supplier screens in the context of the 
Commissions' review of an applicant's request for market-based rate 
authorizations.
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    \30\ See generally Order No. 697, FERC Stats. & Regs. ] 31,252.
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    25. The Commission also notes that using a more conservative screen 
such as the study area's peak load may trigger ``false positives'' that 
put additional burdens on sellers to rebut the presumption of market 
power and require additional analysis. As a result, the Commission 
seeks comment on the magnitude of the additional burden and whether 
that burden is outweighed by the benefits of adopting a modified 
pivotal supplier screen to provide a more accurate analysis.
    26. As noted above, the Commission is interested in the use of an 
appropriately constructed pivotal supplier screen in the context of its 
review of applications under FPA section 203. The Commission seeks 
comment on whether adding a pivotal supplier analysis to its review of 
a section 203 application would enhance the Commission's analysis of 
section 203 transactions. Because the Commission's review of a section 
203 application focuses on whether a proposed transaction will have an 
adverse effect on competition rather than whether there is a dominant 
market participant, the Commission also requests comment on whether a 
pivotal supplier analysis for a section 203 application should be 
different from that used for the Commission's review of a market-based 
rate application, and if so, how it should be adjusted. While pivotal 
supplier tests are usually applied to analysis of energy-only markets, 
the Commission notes that these analyses could be applied to capacity 
and ancillary service markets in both the sections 203 and 205 
contexts. Adding a pivotal supplier test to the Commission's review of 
a section 203 application could make the Commission's analysis more 
effective because it would take into account the ability to meet 
demand, in addition to supply conditions, in screening for potential 
market power. While the available economic capacity measure \31\ in the 
delivered price test deducts for native load obligations, market 
conditions may be such that the residual supply is many times greater 
than any market demand outside of native load obligations. Conversely, 
in more concentrated markets, a pivotal supplier analysis provides 
important information about the ability to exercise market power 
because small changes in supply could lead to large changes in price. 
For example, adjustments could include a determination of whether a 
transaction would create a pivotal supplier where there was none or 
whether an existing pivotal supplier is pivotal in a greater number of 
hours. This information may help to answer questions from a slightly 
different perspective than pure market concentration analysis as 
measured by the delivered price test, such as how a transaction would 
result in an increase of market power or whether market demand is low 
enough as compared to existing supply such that a large HHI change does 
not necessarily create the ability to withhold output and competing 
supply can serve the peak load.
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    \31\ 1996 Merger Policy Statement, FERC Stats. & Regs. ] 31,044 
at 30,132.
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    27. Finally, the Commission seeks comments on how to interpret the 
results if it incorporates a pivotal supplier analysis into its section 
203 analysis. In particular, should the Commission factor into its 
determination whether a proposed transaction causes an applicant to 
become pivotal? If the applicant is

[[Page 66654]]

already pivotal, should the Commission require mitigation to alleviate 
any enhancement in an applicant's status as a pivotal supplier that 
results from the transaction?

E. Market Share Analysis

    28. The Commission's section 203 analysis focuses primarily on 
changes in market concentration arising from a proposed 
transaction.\32\ The Commission's section 203 analysis is a forward-
looking analysis of the effect of the proposed transaction, and it 
focuses largely on concentration of the market and not an examination 
of market share changes or accumulation of market share over time. As a 
consequence, the section 203 analysis may not include complete 
information about an applicant's overall presence in a market. 
Therefore, the Commission seeks comment on the potential benefits of 
expanding its section 203 analysis to include an examination of market 
share.
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    \32\ Tucson Elec. Power Co., 149 FERC ] 61,056, at P 30 (2014) 
(the Commission will consider evidence of anticompetitive effects 
other than increases in HHI).
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    29. Unlike the pivotal supplier analysis, discussed above, that 
focuses on the size of the applicant relative to the maximum capacity 
needed to serve load, a market share analysis focuses on the size of 
the applicant relative to all other suppliers in the market.\33\ An 
overall market share screen in the section 203 context would enable the 
Commission to determine if a seller has obtained a significant share in 
a specific market either through a series of transactions or a 
combination of transactions and construction, allowing for the 
accumulation of market power without one particular transaction 
triggering concerns. The Commission seeks comment on whether there is a 
specific market share above which market power concerns would arise in 
a section 203 review. For example, in evaluating applications for 
market-based rate authority, the Commission applies a 20 percent market 
share threshold in determining whether an application raises market 
power concerns.\34\ The Commission seeks comment on whether a market 
share threshold is appropriate in its review of section 203 
applications and, if so, what that threshold should be. The Commission 
seeks further comment on whether market share analyses should be 
applied to capacity and ancillary service markets, in addition to 
energy markets.
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    \33\ The Commission's existing delivered price test analysis 
requirement in the implementing regulations of the FPA section 203 
program incorporate individual market shares; therefore, we believe 
market share information is readily available for most applicants to 
be able to complete a market share analysis.
    \34\ See Order No. 697, FERC Stats. & Regs. ] 31,252 at PP 89-
93.
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    30. The Commission also seeks comment on whether the market share 
threshold, or an alternative analysis, would adequately address 
concerns that an entity has accumulated a dominant position in a market 
over time through a series of acquisitions, i.e., the serial merger 
theory. Such an alternative analysis could consider changes in market 
concentration resulting from an entity's past mergers and acquisitions 
over a certain time period. For example, the Commission could establish 
a threshold where, if an entity proposes to acquire another entity (or 
its generation assets) and that acquiring entity has made other 
acquisitions that have cumulatively increased its market share by 10 
percent or more over the previous five years, the newest acquisition 
would not be considered de minimis and would require a complete 
horizontal competitive analysis.

F. Capacity Associated With Power Purchase Agreements

    31. The Commission is interested in whether it should alter the way 
in which it accounts for capacity associated with long-term firm PPAs 
\35\ in the Commission's review of a section 203 application. 
Currently, if a purchasing utility entered into a long-term firm PPA 
for the output of a generating facility before filing a section 203 
application to acquire that same facility, the Commission has generally 
considered the generation capacity of that facility to be attributed to 
the purchasing utility's pre-acquisition market share. Because the 
capacity of the facility is already attributed to the purchaser, the 
acquisition of the facility will not increase the purchaser's market 
share under the Commission's screens. Therefore, the transaction would 
be considered to have no adverse effect on competition.\36\
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    \35\ The Commission has defined a long-term PPA to be one that 
has a contract term of one year or longer. Refinements to Policies 
and Procedures for Market-Based Rates for Wholesale Sales of 
Electric Energy, Capacity and Ancillary Services by Public 
Utilities, Order No. 816, 80 FR 67056 (Oct. 30, 2015), FERC Stats. & 
Regs. ] 31,374, at P 143 (2015), order on reh'g and clarification, 
Order No. 816-A, FERC Stats. & Regs. ] 31,382 (2016).
    \36\ The Commission recently clarified that market-based rate 
applications must attribute a long-term firm PPA to the purchaser 
when the PPA has an associated long-term transmission reservation. 
Order No. 816, FERC Stats. & Regs. ] 31,374 at P 138.
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    32. While the current approach of attributing the capacity of the 
facility to the purchaser is appropriate in the context of the market-
based rate market power analysis, in the section 203 context the change 
in market concentration may extend beyond the terms of the PPA. For 
example, if a transaction conveys ownership over a generation facility 
where a PPA is expiring in two years, the transaction may prevent 
competitive supply from reentering the market. In the Commission's 
review of a section 203 application, the impact of a proposed 
transaction on horizontal competition is assessed when the section 203 
filing is made seeking authorization of the acquisition. However, a 
market power analysis is not conducted upon the expiration of the 
contract. The Commission seeks comment on whether it should use 
alternative methodologies in its review of a section 203 application to 
account for the capacity associated with long-term firm PPAs to 
increase the accuracy of its market power analyses with respect to such 
PPAs. For example, where a section 203 applicant seeks approval to 
purchase a generating facility from which it already purchases the 
output under a long-term firm PPA, that applicant could be asked to 
provide a delivered price test analysis showing the HHI impacts under 
two different scenarios: (1) With the capacity attributed solely to the 
current facility owner; and (2) with the capacity attributed solely to 
the applicant proposing to acquire the facility. Alternatively, the 
Commission could attribute a facility's capacity to the facility owner 
only under certain circumstances, including: (1) If the term of the PPA 
began one year or less prior to the filing of the section 203 
application; (2) if the PPA expires prior to the end of the study 
period used in the applicant's delivered price test analysis; \37\ or 
(3) if the facility is external to the purchaser's BAA but does not 
have firm transmission service to the purchaser's BAA. Applicants with 
long-term firm PPAs could also be required to justify in a detailed 
manner why the capacity in question should be attributed to the 
facility purchaser. The Commission seeks comments on these proposals.
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    \37\ Merger analysis should be as forward looking as 
practicable, typically a delivered price test will study projected 
market conditions on a forward-looking basis after the proposed 
transaction is expected to close. See Order No. 642, FERC Stats. & 
Regs. ] 31,111 at 31,887.
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G. Applicant Merger-Related Documents

    33. As part of the Commission's assessment regarding whether we 
should revise aspects of our review of section 203 applications, the 
Commission requests comment on whether, for transactions that require a 
full Competitive Analysis Screen, it

[[Page 66655]]

should require the submission of additional documentation that may 
assist the Commission's review of certain proposed transactions. 
Specifically, the Commission understands that applicants submit to DOJ 
and/or FTC consultant reports and other internal reports that assess 
the competitive effects of the merger. The Commission seeks comment 
regarding whether the Commission should require applicants to submit as 
part of their section 203 application these consultant reports and 
internal reports (merger-related documents) required by DOJ and/or FTC. 
The Commission would continue to rely on the Competitive Analysis 
Screen to make its determination, but we believe these merger-related 
documents could be useful in the Commission's understanding of an 
applicant's Competitive Analysis Screen by providing additional 
information regarding, for example, the relevant geographic market 
definition or anticipated unit retirements.
    34. We recognize that imposing a new requirement regarding the 
submission of such merger-related documents could impose a burden on 
applicants or raise other concerns. However, we do not anticipate that 
the burden of requiring submission of these merger-related documents 
would be significant because applicants already are required to submit 
such documents to other federal governmental agencies reviewing the 
competitive effects of the proposed transaction. In addition, we 
recognize that there could be concerns regarding the commercially 
sensitive nature of these merger-related documents, and how such 
documents would be protected once submitted to the Commission. The 
Commission seeks comments on this proposal, including the likely costs 
and benefits of including the merger-related documents in its 
processing of section 203 applications and the confidentiality concerns 
that this proposal may raise.

H. Blanket Authorizations

    35. EPAct 2005 \38\ revised the scope of transactions subject to 
the Commission's review under section 203. Among other things, the 
amended section 203 codified the Commission's review authority to 
include authority over certain holding company mergers and 
acquisitions,\39\ as well as certain public utility acquisitions of 
generating facilities.\40\ In Order No. 669,\41\ the Commission 
promulgated regulations adopting certain modifications to 18 CFR part 
33 and section 2.26 to implement the amended section 203 and, in so 
doing, granted blanket authorizations for certain types of 
transactions, including foreign utility acquisitions by holding 
companies, intra-holding company system financing and cash management 
arrangements, certain internal corporate reorganizations, and certain 
investments in transmitting utilities and electric utility companies. 
Under these blanket authorizations, even though the transaction may be 
jurisdictional under section 203, no application or prior Commission 
authorization is needed prior to completing the transaction although 
some have reporting requirements and other conditions.\42\
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    \38\ EPAct 2005, Public Law 109-58, 1289, 119 Stat. 594, 982-83.
    \39\ 16 U.S.C. 824b(a)(2).
    \40\ 16 U.S.C. 824b(a)(1)(D).
    \41\ Transactions Subject to FPA Section 203, Order No. 669, 
FERC Stats. & Regs. ] 31,200 (2005), order on reh'g, Order No. 669-
A, FERC Stats. & Regs. ] 31,214, order on reh'g, Order No. 669-B, 
FERC Stats. & Regs. ] 31,225 (2006).
    \42\ See 18 CFR 33.1(c)(1)(i)-(ii), (c)(2), (c)(5), (c)(10), 
(c)(12).
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    36. In Order No. 708,\43\ the Commission established five 
additional blanket authorizations. Four of these blanket authorizations 
apply to transactions in which a public utility seeks to transfer its 
outstanding voting securities to another holding company that has 
already been granted blanket authorization under various provisions of 
section 33.1(c).\44\ The fifth blanket authorization applies to the 
acquisition or disposition of a jurisdictional contract where: (1) 
Neither the acquirer nor transferor has captive customers or owns or 
provides transmission service over jurisdictional transmission 
facilities; (2) the contract does not convey control over the operation 
of a generation or transmission facility; (3) the parties to the 
transaction are neither affiliates nor associate companies; and (4) the 
acquirer is a public utility.\45\
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    \43\ Blanket Authorization Under FPA Section 203, Order No. 708, 
FERC Stats. & Regs. ] 31,265, order on reh'g, Order No. 708-A, FERC 
Stats. & Regs. ] 31,273 (2008), order on reh'g, Order No. 708-B, 
FERC Stats. & Regs. ] 31,290 (2009).
    \44\ 18 CFR 33.1(c)(12)-(15).
    \45\ 18 CFR 33.1(c)(16).
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    37. As discussed above, since these blanket authorizations were 
granted, industry has undergone substantial change including continued 
market development and expansion of RTOs/ISOs, consolidation among 
utilities, such that the conditions that gave rise to the blanket 
authorizations currently in effect may no longer be appropriate. For 
example, it may no longer be appropriate to grant blanket 
authorizations to holding companies that only hold exempt wholesale 
generators, as is granted in 18 CFR 33.1(c)(8), as exempt wholesale 
generators now make up a significant portion of supply and any 
transaction involving these generators could affect wholesale rates by 
impacting competition. In light of these changes and others, the 
Commission seeks comment on whether there are existing blanket 
authorizations under section 203 that are no longer appropriate.
    38. Industry change has also led to an evolution in the types of 
transactions that are submitted to the Commission for section 203 
approval but which may not give rise to the competitive concerns 
considered when analyzing whether a transaction is consistent with the 
public interest. Such transactions include the disposition of 
securities with limited rights to governance of the public utility, as 
well as transfers of pieces of the transmission system that are 
consolidated into the existing transmission network of a public 
utility. Many applications submitted under section 203 present no 
concerns and are found to be consistent with the public interest and 
are approved by the Commission without condition. The Commission seeks 
comment on whether there are classes of transactions that share 
characteristics for which further blanket authorizations would be 
appropriate, and whether specific reporting requirements would also be 
appropriate in certain cases.

I. Transactions Subject to Only Section 203(a)(1)(B)

    39. As discussed above, in EPAct 2005, Congress revised the scope 
of the Commission's jurisdiction under section 203. For certain types 
of transactions, Congress established a ``minimum threshold'' of $10 
million for requiring Commission approval.\46\ In contrast, under 
section 203(a)(1)(B) a public utility requires Commission authorization 
before it ``merge[s] or consolidate[s], directly or indirectly'' its 
jurisdictional facilities with those of another person with no minimum 
dollar threshold. Based on the plain language of the statute, the 
Commission has not established a minimum threshold for transactions 
under section 203(a)(1)(B).\47\ Accordingly, there are

[[Page 66656]]

scenarios in which transfers of low-value equipment require Commission 
review. These transactions account for a large percentage of the 
section 203 filings submitted to the Commission,\48\ and many of them 
do not raise concerns under the Commission's public interest analysis.
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    \46\ 16 U.S.C. 824b(a)(1)(A), (C), (D).
    \47\ In Order No. 669, the Commission stated:
    While Congress included a $10 million threshold for amended 
subsections 203(a)(1)(A), (C), (D), and 203(a)(2) (dispositions of 
jurisdictional facilities; acquisitions of securities of public 
utilities; purchase of existing generation facilities; holding 
company acquisitions), Congress clearly did not adopt a monetary 
threshold for mergers and consolidations in amended subsection 
203(a)(1)(B).
    Order No. 669, FERC Stats. & Regs. ] 31,200 at P 32.
    \48\ For example, in Fiscal Year 2015, the Commission received 
216 applications for approval under section 203. Approximately 20 
percent of those applications were filed only under section 
203(a)(1)(B) and fell below the $10 million threshold.
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    40. As noted above, the Commission has granted blanket 
authorizations for certain jurisdictional transactions. The Commission 
believes there may be certain other categories of transactions for 
which abbreviated filing requirements may be appropriate. Thus, the 
Commission seeks comment on whether there are categories of proposed 
transactions that are jurisdictional only under section 203(a)(1)(B) 
that, by their nature, do not require the same level of scrutiny by the 
Commission. One such category of proposed transactions could include 
those below a minimum dollar threshold. Such a threshold would be 
distinct from the threshold for the Commission to review a section 203 
transaction, and would establish a benchmark for identifying 
transactions under section 203(a)(1)(B) that are jurisdictional but 
that would not require the same level of scrutiny by the Commission.
    41. If such categories can be identified, the Commission seeks 
comment on ideas for facilitating expeditious processing of those 
transactions, consistent with the Commission's obligations under the 
FPA. The Commission offers, as an example, the adoption of abbreviated 
filing requirements for those transactions under section 203(a)(1)(B) 
that fall within certain categories. These abbreviated filing 
requirements could include: (a) A request for partial waiver that sets 
forth the requirements for which waiver is sought; and (b) a 
certification by the applicants that the proposed transaction does not 
raise concerns under the Commission's analysis of whether a transaction 
is consistent with the public interest (i.e., the transaction will have 
no adverse effect on competition, rates, or regulation, and will not 
result in cross-subsidization). The Commission seeks comment on 
alternative methods as well.

III. Comment Procedures

    42. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice, including any related 
matters or alternative proposals that commenters may wish to discuss. 
Comments are due November 28, 2016. Comments must refer to Docket No. 
RM16-21-000, and must include the commenter's name, the organization 
they represent, if applicable, and their address in their comments.
    43. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing 
formats. Documents created electronically using word processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    44. Commenters that are not able to file comments electronically 
must send an original of their comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE., 
Washington, DC 20426.
    45. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

IV. Document Availability

    46. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through the Commission's Home Page (http://www.ferc.gov) and 
in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street NE., Room 2A, 
Washington DC 20426.
    47. From the Commission's Home Page on the Internet, this 
information is available on eLibrary. The full text of this document is 
available on eLibrary in PDF and Microsoft Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    48. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours from the Commission's Online 
Support at 202-502-6652 (toll free at 1-866-208-3676) or email at 
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at 
public.referenceroom@ferc.gov.

    By direction of the Commission.

    Issued: September 22, 2016
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2016-23443 Filed 9-27-16; 8:45 am]
 BILLING CODE 6717-01-P