
[Federal Register Volume 77, Number 35 (Wednesday, February 22, 2012)]
[Notices]
[Pages 10492-10501]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4050]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM11-14-000]


 Order Reaffirming Commission Policy and Terminating Proceeding; 
Analysis of Horizontal Market Power Under the Federal Power Act

Before Commissioners: Jon Wellinghoff, Chairman; Philip D. Moeller, 
John R. Norris, and Cheryl A. LaFleur.

    1. On March 17, 2011, the Commission issued a Notice of Inquiry\1\ 
seeking comment on whether, and, if so, how, the Commission should 
revise its approach to examining horizontal market power concerns under 
section 203 of the Federal Power Act (FPA) \2\ to reflect the 
Horizontal Merger Guidelines issued by the Department of Justice (DOJ) 
and Federal Trade Commission (FTC) (collectively, Antitrust Agencies) 
on August 19, 2010 (2010 Guidelines). The Commission also sought 
comment on what impact, if any, the 2010 Guidelines should have on the 
Commission's analysis of horizontal market power in its electric-market 
based rate program under section 205 of the FPA.\3\ Seventeen parties 
filed comments in response to the NOI.\4\
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    \1\ Analysis of Horizontal Market Power under the Federal Power 
Act, Notice of Inquiry, 76 FR 16,394 (Mar. 23, 2011), FERC Stats. & 
Regs. ] 35,571 (2011) (NOI).
    \2\ 16 U.S.C. 824b (2006).
    \3\ 16 U.S.C. 824d (2006).
    \4\ A list of the commenters is provided in Appendix A.
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    2. As discussed below, after reviewing the comments received, the 
Commission has decided to retain its existing policies regarding the 
analysis of horizontal market power when reviewing transactions under 
section 203 of the FPA and in its electric market-based rate program. 
Accordingly, we will terminate the proceeding in Docket No. RM11-14-
000.

I. Background

A. Section 203

    3. Under section 203 of the FPA, Commission authorization is 
required for public utility mergers and consolidations and for public 
utility acquisitions of jurisdictional facilities. Section 203(a) 
provides that the Commission shall approve such transactions if they 
are consistent with the public interest. The Commission has stated that 
it will consider three factors when analyzing a proposed merger: the 
effect on competition, the effect on rates, and the effect on 
regulation.\5\ The Energy Policy Act of 2005 added the further 
requirement that the Commission determine whether a proposed 
transaction would result in cross-subsidization, and if so, whether the 
resulting cross-subsidization would be consistent with the public 
interest.\6\
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    \5\ Inquiry Concerning the Commission's Merger Policy Under the 
Federal Power Act: Policy Statement, Order No. 592, FERC Stats. & 
Regs. ] 31,044 (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) (Supplemental Policy Statement).
    \6\ Energy Policy Act of 2005, Public Law 109-58, 1289, 119 
Stat. 594, 982-83 (2005), codified, 16 U.S.C. 824b(a)(4).
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    4. The Commission adopted the five-step framework set out in the 
Antitrust Agencies' 1992 Horizontal Merger Guidelines (1992 Guidelines) 
\7\ as the basic framework for evaluating the competitive effects of 
proposed mergers.\8\ The Commission also adopted an analytic screen 
(Competitive Analysis Screen), based on the 1992 Guidelines and 
outlined in Appendix A of the Merger Policy Statement, which focuses on 
the first step in the analysis: Whether the merger would significantly 
increase concentration in relevant markets. The components to a screen 
analysis are as follows: (1) Identify the relevant products; (2) 
identify customers who may be affected by the merger; (3) identify 
potential suppliers to each identified customer (includes a delivered 
price test (DPT) analysis, consideration of transmission capability, 
and a check against actual trade data); and (4) analyze market 
concentration using the Herfindahl-Hirschman Index (HHI) \9\ thresholds 
from the 1992 Guidelines.\10\
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    \7\ U.S. Dept. of Justice & Federal Trade Commission, 
``Horizontal Merger Guidelines'' (1992), as revised (1997) (1992 
Guidelines).
    \8\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,118, 30,130. The five steps are: (1) Assess whether the merger 
would significantly increase concentration and result in a 
concentrated market, properly defined and measured; (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 market entry would 
be timely, likely and sufficient either to deter or counteract the 
competitive effects of concern; (4) assess whether the merger would 
result in increases in efficiency that cannot reasonably be achieved 
through the parties by other means; and (5) assess whether either 
party to the merger would fail without the merger, causing its 
assets to exit the market. Id. at 30,111.
    \9\ The HHI is a widely accepted measure of market 
concentration, calculated by squaring the market share of each firm 
competing in the market and summing the results. The HHI increases 
both as the number of firms in the market decreases and as the 
disparity in size between those firms increases. Both the Antitrust 
Agencies and the Commission use HHI to assess market concentration.
    \10\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,119-20, 30, 128-37.

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[[Page 10493]]

    5. The Commission stated that the Competitive Analysis Screen is 
intended to identify mergers that clearly do not raise competitive 
concerns early in the process and that it believes that the screen 
produces a reliable, generally conservative analysis of the competitive 
effects of a proposed merger.\11\ The Commission acknowledged, however, 
that the screen is not infallible. Accordingly, the Commission stated 
that claims that the screen has failed to detect certain market power 
problems or disputes about the way that a particular analysis has been 
conducted can be raised by intervenors and Commission staff. The 
Commission also stated that intervenors may file alternative 
competitive analyses, accompanied by appropriate data, to support their 
arguments.\12\
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    \11\ Id. at 30,119.
    \12\ Id.
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B. Market-Based Rates

    6. The Commission allows sales of electric energy, capacity, and 
ancillary services at market-based rates if the applicant and its 
affiliates do not have, or have adequately mitigated, horizontal and 
vertical market power.\13\ The Commission adopted two indicative 
screens, the wholesale market share screen and the pivotal supplier 
screen, to identify sellers that raise no horizontal market power 
concerns and can otherwise be considered for market-based rate 
authority.\14\ The wholesale market share screen measures whether a 
seller has a dominant position in the market in terms of the number of 
megawatts of uncommitted capacity owned or controlled by the seller, as 
compared to the uncommitted capacity of the entire market.\15\ A seller 
whose share of the relevant market is less than 20 percent during all 
seasons passes the market share screen.\16\ 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.\17\ A seller satisfies the pivotal supplier screen if 
its uncommitted capacity is less than the net uncommitted supply in the 
relevant market.\18\ Failing either screen creates a rebuttable 
presumption that the seller has horizontal market power.\19\ If a 
seller passes both screens, however, there is a rebuttable presumption 
that it does not possess horizontal market power.
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    \13\ 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 P 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).
    \14\ Id. P 13, 62.
    \15\ Id. P 43.
    \16\ Id. P 43-44, 80, 89.
    \17\ Id. P 35.
    \18\ Id. P 42.
    \19\ Id. P 44.
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    7. A seller that fails either indicative screen has several 
procedural options. It has the right to present alternative evidence to 
rebut the presumption of horizontal market power, including a DPT.\20\ 
In the alternative, a seller may accept the presumption of market power 
and adopt some form of cost-based mitigation.\21\ Sellers use the 
results of the DPT to perform pivotal supplier and market share 
analyses. In addition, sellers use the results of the DPT to analyze 
market concentration using HHI. The Commission stated that a showing of 
an HHI less than 2,500 in the relevant market for all season/load 
periods for sellers that have also shown that they are not pivotal and 
do not posses a market share of 20 percent or greater in any of the 
season/load periods would constitute a showing of a lack of market 
power, absent compelling contrary evidence from intervenors. The 
Commission stated that, as with the indicative screens, a seller may 
submit alternative evidence to rebut or support the results of the DPT, 
such as historical sales or transmission data.\22\
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    \20\ Id. P 63; 18 CFR 35.37(c)(2) (2011).
    \21\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 63; 18 CFR 
35.37(c)(3) (2011).
    \22\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 117.
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C. Notice of Inquiry

    8. The NOI highlighted some features of the 2010 Guidelines and how 
those guidelines differ from the Commission's process for reviewing 
mergers under section 203 of the FPA. In particular, the Commission 
noted that the 2010 Guidelines modify the thresholds used to classify 
the relative concentration of a market and to assess the competitive 
significance of a post-merger change in HHI, as summarized in the table 
below.\23\
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    \23\ NOI, FERC Stats. & Regs. ] 35,571 at P 12.

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                                               1992            2010
                 Market                     Guidelines      Guidelines
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                  HHI (Market Concentration) Thresholds
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Unconcentrated..........................           <1000           <1500
Moderately Concentrated.................       1000-1800       1500-2500
Highly Concentrated.....................           >1800           >2500
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    HHI Changes Potentially Raising Significant Competitive Concerns
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Moderately Concentrated Markets.........            >100            >100
Concentrated Markets....................             >50      >100, <200
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           HHI Changes Presumed Likely to Enhance Market Power
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Concentrated Markets....................            >100            >200
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    9. In addition, the Commission explained that the 2010 Guidelines 
deemphasize market definition as a starting point for the Antitrust 
Agencies' analysis and depart from the sequential analysis of the 1992 
Guidelines. Instead, the 2010 Guidelines state that the Antitrust 
Agencies will engage in a fact-specific inquiry using a variety of 
analytical tools, including direct evidence of competition between the 
parties and economic models that are designed to quantify the extent to 
which the merged firm can raise prices as a result of the merger.\24\ 
The Commission further noted that the 2010 Guidelines address the 
potential competitive effects arising from partial acquisitions and

[[Page 10494]]

minority ownership. Specifically, the Commission stated that the 
Antitrust Agencies' analysis of partial acquisitions and minority 
ownership focuses on: (1) Whether the acquiring company will be able to 
influence the competitive conduct of the target firm; (2) whether the 
partial acquisition will reduce the financial incentive to compete 
because losses from one owned firm are offset by gains at the other; 
and (3) whether the partial acquisition enables companies to access 
non-public competitive information that can lead to coordinated 
activity by the firms.\25\
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    \24\ Id. P 13.
    \25\ Id. P 14. The Commission noted that issues relating to 
partial acquisitions are among the issues before the Commission in 
Docket No. RM09-16-000. Id. P 14, n.27 (citing Control and 
Affiliation for Purposes of Market-Based Rate Requirements under 
Section 205 of the Federal Power Act and the Requirements of Section 
203 of the Federal Power Act, Notice of Proposed Rulemaking, FERC 
Stats. & Regs. ] 32,650 (2010) (Control and Affiliation NOPR)).
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    10. The NOI 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. The Commission asked whether the 
Commission should, like the 2010 Guidelines, place less emphasis on 
market definition as the first step in its analysis and move away from 
the use of a sequential analysis for analyzing horizontal market power 
under section 203 of the FPA. Additionally, the Commission asked what 
elements of the 2010 Guidelines the Commission should adopt and sought 
comments on whether the Commission should adopt the HHI thresholds 
contained in the 2010 Guidelines. Finally, the Commission sought 
comment on what impact, if any, the 2010 Guidelines should have on the 
Commission's analysis of horizontal market power in its electric 
market-based rate program.\26\
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    \26\ Id. P 15-21.
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II. Discussion

    11. As further discussed below, after careful consideration of the 
comments submitted in response to the NOI, the Commission has 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.

A. Section 203 Analysis

1. Comments in Support of Retaining the Commission's Current Analysis
a. Market Definition and Market Concentration
    12. A number of commenters argue that the Commission should 
continue to emphasize market definition and the calculation of market 
shares and market concentration as the first step in its analysis. EEI, 
EPSA, and Dr. Morris, a consultant with Economists Incorporated, state 
that the Competitive Analysis Screen provides certainty to applicants 
and, as a result, produces better filings and assists applicants in 
determining whether their proposals raise competitive concerns and 
require remedies.\27\ Dr. Morris adds that preparing a Competitive 
Analysis Screen is relatively inexpensive when compared with computer 
simulation models. Dr. Morris observes that, while the DOJ conducts 
competitive effects analyses and the models used by the agency have 
advanced, the modeling that DOJ uses has not yet provided more reliable 
information on the competitive effects of a merger than the market 
concentration screens used by the Commission.\28\ EEI states that the 
Commission's methodology strikes the appropriate balance in identifying 
transactions that pose a threat of competitive harm while providing a 
streamlined process for approving ones that do not.\29\
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    \27\ Morris Comments at 21-22; EEI Comments 5-9; EPSA Comments 
at 7-8.
    \28\ Morris Comments at 21.
    \29\ EEI Comments at 6-8.
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    13. Additionally, several commenters maintain that the analysis 
embodied in the 2010 Guidelines is incompatible with the realities of 
the Commission's process of reviewing mergers and other transactions 
under section 203 of the FPA. In particular, these commenters note 
that, unlike the procedures used by the Antitrust Agencies, proceedings 
under section 203 are required to be on-the-record and the Commission's 
decision must be presented in a published order, subject to the 
requirements of reasoned decision making and the possibility of 
judicial review.\30\ Commenters also claim that it would be infeasible 
to conduct the type of analysis envisioned by the 2010 Guidelines in 
the 180-day time period prescribed by Congress and that the 
Commission's current methodology facilitates timely decisions by the 
Commission.\31\
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    \30\ Id. at 9-12; EPSA Comments at 5-6.
    \31\ EEI Comments at 12-14; EPSA Comments at 5-6; Morris 
Comments at 20.
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    14. Moreover, commenters explain that the Commission need not 
resort to the open-ended process embraced in the 2010 Guidelines to 
protect the public interest and that the Commission has the experience 
necessary to determine what methodologies are appropriate for assessing 
market power in electricity markets.\32\ Modesto states that 
application of the Commission's current analysis will better protect 
consumers from the anticompetitive effects of mergers.\33\ Similarly, 
APPA, NRECA, ELCON, and NASUCA state that the Antitrust Agencies' 
efforts to revise their analysis and the changes embodied in the 2010 
Guidelines are tied to the characteristics of markets with 
differentiated products where, unlike markets for electricity, 
ascertaining the relevant market and assessing market concentration are 
less relevant for identifying competitive concerns.\34\ ELCON and 
NASUCA add that the Commission has already adopted an approach that 
reflects those changes that are most relevant to electricity markets by 
expressing a willingness to look beyond changes in HHI.\35\ APPA and 
NRECA state that while the Commission should consider whether some of 
the analytical tools described in the 2010 Guidelines would prove 
useful in the Commission's merger analysis, these tools should not act 
as substitutes for market definition and market concentration.\36\
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    \32\ EEI Comments at 9, 14-15; EPSA Comments at 6-7.
    \33\ Modesto Comments at 4.
    \34\ APPA and NRECA Comments at 9-10; ELCON and NASUCA Comments 
at 4.
    \35\ ELCON and NASUCA Comments at 4.
    \36\ APPA and NRECA Comments at 2-3.
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    15. A number of commenters argue that the Commission's current 
analytical framework already permits the consideration of the evidence 
identified in the 2010 Guidelines when appropriate. Mr. Cavicchi, 
Senior Vice President at Compass Lexecon, notes that the Commission has 
already acknowledged that the Commission should consider additional 
evidence of competitive effects where an applicant fails the 
Competitive Analysis Screen. Mr. Cavicchi asserts, however, that it 
would be appropriate in such circumstances to collaborate with the 
Antitrust Agencies to reduce the burden on the applicant.\37\ TAPS and 
TDU Systems state that the 2010 Guidelines highlight the need for the 
Commission to consider intervenor theories of competitive harm, 
regardless of whether

[[Page 10495]]

the proposed transaction passes the Competitive Analysis Screen.\38\
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    \37\ Cavicchi Comments at 6-7 (citing Supplemental Policy 
Statement, FERC Stats. & Regs. ] 31,253, at P 65).
    \38\ TAPS and TDU Systems Comments at 16-17.
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b. HHI Thresholds
    16. A number of commenters argue that the Commission should retain 
its existing HHI thresholds. TAPS, TDU Systems, ELCON, and NASUCA 
caution the Commission against selectively incorporating particular 
aspects of the 2010 Guidelines, especially the HHI thresholds.\39\ 
These commenters state that the 2010 Guidelines should be viewed as a 
comprehensive whole and that the 2010 Guidelines' relaxation of the HHI 
thresholds is merely one small element of a broader analytical 
overhaul. TAPS and TDU Systems further note that the Antitrust Agencies 
have different statutory obligations than the Commission and that, even 
before the Antitrust Agencies adopted the 2010 Guidelines, the 
Commission and the Antitrust Agencies implemented merger review in the 
context of the electric industry differently.\40\
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    \39\ Id. at 4, 6-7; ELCON and NASUCA Comments at 5.
    \40\ TAPS and TDU Systems Comments at 6-7.
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    17. Commenters also claim that the more relaxed HHI thresholds 
embodied in the 2010 Guidelines are inappropriate in electricity 
markets. The New York Commission, ELCON, NASUCA, APPA, NRECA and 
Monitoring Analytics state that the Commission's current thresholds 
remain appropriate because electricity markets are more susceptible to 
the exercise of market power--due to the large capital investments 
associated with entry, the lack of substitutable products, the lack of 
storage, and the relative inelasticity of demand--than many of the 
industries that the Antitrust Agencies review.\41\ APPA and NRECA add 
that there is no evidence that the current thresholds are too low, 
result in too many false positives, or that the electricity industry 
has undergone changes that warrant relaxing the Commission's 
thresholds.\42\ TAPS and TDU Systems agree that there have been no 
changes supporting modification of the thresholds and that adopting the 
revised thresholds would undermine the Commission's ability to fulfill 
its statutory mandate and to accurately assess the competitive impact 
of a merger.\43\ Similarly, Modesto notes that the Commission faces 
challenges in identifying the scope of market power in analyzing 
section 203 applications and argues that relaxing the HHI thresholds 
would serve to frustrate those efforts by easing scrutiny over 
affiliates and companies whose relationship to the applicant company is 
not readily apparent.\44\ AAI states that lower thresholds may be 
appropriate in electric markets because the adverse effects of electric 
utility mergers are not likely to be mitigated by entry or 
efficiencies.\45\
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    \41\ New York Commission Comments at 3-4; ELCON and NASUCA 
Comments at 4-5; APPA and NRECA Comments at 2; Monitoring Analytics 
Comments at 6.
    \42\ APPA and NRECA Comments at 2, 10-17.
    \43\ Id. at 11-12.
    \44\ Modesto Comments at 4-5.
    \45\ AAI Comments at 15.
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    18. Berkeley argues that the Commission should not make any 
decision to change its HHI thresholds without first directing 
Commission staff to study consummated electric mergers in order to 
determine whether the current thresholds have been effective, and 
compare the results to alternative predictions of competitive 
impacts.\46\
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    \46\ Berkeley Comments at 5.
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c. Other Aspects of the 2010 Guidelines
    19. While, as noted below, EPSA supports the adoption of the HHI 
thresholds contained in the 2010 Guidelines, EPSA contends that the 
Commission should refrain from adopting other aspects of the 2010 
Guidelines. In particular, EPSA states that the Commission should not 
adopt the 2010 Guidelines' approach to partial acquisitions and 
minority ownership and that the Commission's analysis should continue 
to focus on control. EPSA notes that the provisions of the federal 
antitrust statutes that the Antitrust Agencies are charged with 
enforcing apply to transactions involving one firm's partial 
acquisition of a competitor and the minority position that may result, 
whereas the Commission has made clear that transactions that do not 
transfer control of a public utility do not fall within the meaning of 
the ``or otherwise dispose'' language of section 203(a)(1)(A) and that 
the requirement to obtain the Commission's approval under the ``merge 
or consolidate'' clause in section 203(a)(1)(B) depends upon whether 
the transaction directly or indirectly would result in a change of 
control over the facilities.\47\ EPSA states that there is no 
justification for engaging in a case-by-case consideration of virtually 
every single direct or indirect acquisition of interests in a public 
utility and, as the Commission has previously recognized, requiring 
case-by-case approval under section 203 would be contrary to the intent 
of Congress that the Energy Policy Act of 2005 increase investment in 
the utility sector while protecting customers.\48\ EPSA urges the 
Commission to move forward with a final rule in Docket No. RM09-16-
000.\49\
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    \47\ EPSA Comments at 10-11.
    \48\ Id. at 12 (citing Transactions Subject to Federal Power Act 
Section 203, Order No. 669, FERC Stats. & Regs. ] 31,200, at P 144 
(2005)).
    \49\ Id. at 13.
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2. Comments in Support of Adopting the 2010 Guidelines
a. Market Definition and Market Concentration
    20. Several commenters argue that the Commission should adopt the 
2010 Guidelines because the Competitive Analysis Screen may not 
accurately identify competitive concerns in all circumstances. FTC 
Staff and the PPL Companies state that over-reliance on measures of 
HHI, particularly in electricity markets, can yield conclusions that 
are too lenient or too restrictive in an assessment of market 
power.\50\ FTC Staff states that it believes that consideration of 
other types of evidence identified in the 2010 Guidelines would enrich 
the Commission's analysis of mergers, including observations about the 
actual effect of consummated mergers, direct comparison based on 
experience, evidence of substantial head-to-head competition, and the 
potentially disruptive role of a merging party, unilateral and 
coordinated effects of a transaction, and the competitive effect of the 
transaction on dimensions of competition other than price.\51\ The PPL 
Companies argue that the Commission's over-reliance on HHI thresholds 
has allowed applicants to tailor their applications to avoid triggering 
the HHI thresholds without truly addressing the likely anticompetitive 
effects of a proposed transaction. Therefore, they argue that the 
Commission should supplement its use of market concentration statistics 
with evidence of whether a merger may enhance or lessen 
competition.\52\
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    \50\ FTC Staff Comments at 2; PPL Companies Comments at 5-8.
    \51\ FTC Staff Comments at 2, 4-7.
    \52\ PPL Companies Comments at 16.
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    21. AAI argues that the Commission should supplement its analysis 
of market concentration by considering additional evidence of 
competitive effects. AAI maintains that the differences between the 
Commission's review process and those of the Antitrust Agencies do not 
pose an impediment to adopting the 2010 Guidelines because all of the 
agencies tend to focus on competitive concerns and much of the 
information necessary to assess competitive effects, such as

[[Page 10496]]

prices, identity of rivals, and capacity, are public.\53\ AAI states, 
for example, that evidence could be used to ensure that the markets 
established by the DPT accurately reflect the potential impact of the 
merger, to corroborate the findings of the concentration analysis, and 
to determine whether merging parties have been or, absent the merger, 
would become head-to-head competitors.\54\
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    \53\ AAI Comments at 5-7.
    \54\ Id. at 15-17.
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    22. Similarly, while acknowledging that many aspects of the 2010 
Guidelines are inapplicable to electricity markets, Monitoring 
Analytics recommends that the Commission consider some of the 
additional evidence identified in the 2010 Guidelines, such as the 
actual effects observed in wholesale electricity markets, the 
competitiveness of isolated wholesale electricity markets with varying 
market concentration, and whether, absent the merger, the merging firms 
would have become substantial head-to-head competitors.\55\
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    \55\ Monitoring Analytics Comments at 2-5.
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    23. The Brattle Group maintains that the Competitive Analysis 
Screen may not always yield conservative results because the DPT, by 
examining a merger's effect on one market at a time, ignores whether 
suppliers may have a better opportunity to sell in markets where they 
may obtain higher prices. Thus, the Brattle Group maintains that the 
Commission should look beyond HHI, focus on whether a merger will 
change incentives such that there will be an increase in market price, 
and not wait for a merger to fail the screen to implement a case-
specific theory of competitive harm. The Brattle Group encourages the 
Commission not to abandon the use of market concentration statistics, 
but to set out guiding principles in assessing merger effects based on 
a theory of competitive harm tailored to the realities of the market at 
issue at an early stage of the review.\56\
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    \56\ Brattle Group Comments 5-10.
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    24. Several commenters ask the Commission to refine its approach to 
defining the relevant geographic market. Mr. Cavicchi argues that the 
Commission should pay close attention to market definition. While Mr. 
Cavicchi states that the Commission's current approach to defining 
markets is suitable in many instances, it could be enhanced by drawing 
on additional electric system data that is often readily available. For 
example, he states that an analysis of market pricing data for the 
purposes of delineating geographic markets can be extremely informative 
in some situations.\57\ The PPL Companies also state that the 
Commission should clarify that applicants must use direct evidence to 
establish the relevant markets that they propose.\58\ The Brattle Group 
states that the Commission should improve how the DPT model screens for 
potential suppliers by taking into account each potential supplier's 
opportunity costs.\59\
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    \57\ Cavicchi Comments at 5-6.
    \58\ PPL Companies Comments at 11-12.
    \59\ Brattle Group Comments at 10-11.
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    25. Monitoring Analytics states that the Commission should refine 
its approach to assessing market definition in organized markets by 
using actual information about market participants and operations 
instead of using approximations of seasonal geographic markets that 
assume the model of individual utility territories to define the 
market. Monitoring Analytics further states that it recommends that the 
Commission use market definitions based on actual operational 
substitutability and residual supplier analysis to examine the relative 
importance of the merging firms based on pre- and post-merger positions 
in every relevant market.\60\
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    \60\ Monitoring Analytics Comments at 2-3.
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    26. Dr. Morris recommends that the Commission review its position 
on destination markets because the Commission has issued some 
inconsistent rulings on submarkets and because facts change over time. 
According to Dr. Morris, the Commission has acted inconsistently by 
accepting a study of a submarket where only one of the merging parties 
had assets in some cases, but not in others.\61\ Therefore, Dr. Morris 
asks the Commission to clarify that parties do not need to analyze 
submarkets in Regional Transmission Organizations (RTO) when only one 
of the merging parties owns generation in that submarket. Additionally, 
Dr. Morris states that the Commission should consider whether PJM 
Interconnection-East and Southwest Connecticut still need to be 
considered separate destination markets for DPTs in light of recent 
developments that have reduced constraints in these areas.\62\ While he 
expresses support for the Commission's analysis as a general matter, 
Dr. Morris states that the Commission could consider both the relevant 
market and alternate relevant markets created by regional and local 
constraints.
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    \61\ Morris Comments at 25-27 (citing USGen New England, Inc., 
109 FERC ] 61,361 (2004); FirstEnergy Corp., Application for 
Authorization of Disposition of Jurisdictional Assets, Docket No. 
EC10-68 (filed May 11, 2010)).
    \62\ Id. at 26.
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b. HHI Thresholds
    27. A number of commenters argue that the Commission should adopt 
the 2010 Guidelines' HHI thresholds. In particular, Dr. Morris, Mr. 
Cavicchi, Entergy, the PPL Companies, EPSA, and EEI claim that the 
Commission should adopt these thresholds because they reflect the 
substantial experience of the Antitrust Agencies, which indicates that 
a merger will not enhance market power below these levels. They also 
argue that ongoing oversight of the electric markets by the Commission 
and market monitors provide protections against any perceived danger 
arising from adopting these thresholds.\63\ Dr. Morris adds that 
adopting these thresholds is appropriate because, according to Dr. 
Morris, the Commission rigidly applies its HHI thresholds and the HHI 
thresholds contained in the 2010 Guidelines more accurately reflect the 
likelihood of anticompetitive effects than the Commission's current 
thresholds.\64\ Mr. Cavicchi argues that data compiled by the Antitrust 
Agencies clearly shows that the majority of merger challenges in 
various industries' markets (other than petroleum markets) have been 
focused on markets where post-merger HHIs have been greater than 
2,400.\65\
---------------------------------------------------------------------------

    \63\ Id. at 23-24; Cavicchi Comments at 3; Entergy Comments at 
1-2; PPL Companies Comments at 14-16; EPSA Comments at 8-9; EEI 
Comments at 17-19.
    \64\ Morris Comments at 23.
    \65\ Cavicchi Comments at 3.
---------------------------------------------------------------------------

c. Other Aspects of the 2010 Guidelines
    28. The PPL Companies also propose the following modifications to 
the Commission's analysis: (1) Focus exclusively on available economic 
capacity because only those firms with available economic capacity 
could defeat any attempts by the merged firm to increase prices or 
reduce output; \66\ (2) consider the merger's impact on the supply 
curve; \67\ (3) consider initiating a separate proceeding to examine 
reforms and clarify the criteria to simplify the calculation of 
Simultaneous Import Limits (SIL); \68\ and (4) after the Commission 
adopts these changes to its analysis, consider and seek comments on 
whether changes to the Commission's procedures are necessary, such as 
permitting limited discovery and informal technical conferences upon 
motion of an intervenor or having

[[Page 10497]]

separate staff investigate and comment on a proposed transaction.\69\
---------------------------------------------------------------------------

    \66\ PPL Companies Comments at 13-14.
    \67\ Id. at 17-19.
    \68\ Id. at 19-20.
    \69\ Id. at 20-23.
---------------------------------------------------------------------------

    29. As an initial matter, AAI asks that the Commission more 
formally coordinate with the Antitrust Agencies, in a manner similar to 
the current relationship between the Federal Communications Commission 
and the Antitrust Agencies, to ensure greater consistency in remedies, 
analysis, and findings. AAI also reviewed analyses filed with the 
Commission between 1997 and 2004, which revealed a high degree of 
variation in concentration results for the same market, even when these 
analyses were performed by the same experts.\70\ According to AAI, its 
analysis suggests that the Commission may want to consider initiating 
an inquiry into the modeling methods, data sources, and assumptions 
used in the Competitive Analysis Screen and that the Commission may 
want to take steps to build a more complete record in merger 
proceedings by including certain types of information discussed in the 
2010 Guidelines. AAI further asserts that the Commission should 
consider crafting filing requirements to ensure that the Commission, 
intervenors, and the public have sufficient evidence to conduct 
competitive effects analysis, which is essential when determining if a 
merged firm is likely to exercise market power and, if so, what the 
appropriate remedy should be.\71\
---------------------------------------------------------------------------

    \70\ AAI Comments at 10-14.
    \71\ Id. at 17-18.
---------------------------------------------------------------------------

    30. While APPA and NRECA state that the Commission should continue 
to emphasize market definition and the calculation of market shares and 
market concentration as the first step in its analysis, they state that 
the Commission should adopt additional tools, such as diversion ratios 
and critical loss analysis, to help it in its analysis, to the extent 
possible. However, they emphasize that these tools should not be a 
substitute for the Commission's existing analysis, including the 
Competitive Analysis Screen.\72\
---------------------------------------------------------------------------

    \72\ APPA and NRECA Comments at 22.
---------------------------------------------------------------------------

    31. Several commenters argue that the Commission should adopt the 
2010 Guidelines' approach to analyzing monopsony power (buyer market 
power). Noting that the Commission has previously acknowledged that an 
evaluation of buyer market power may be appropriate in some instances, 
AAI suggests that the Commission should take the following approaches 
when evaluating such issues: (1) The Commission should avoid relying on 
market power mitigation measures in organized markets to address buyer 
market power issues raised in merger cases; (2) the Commission's 
standard, as in the 2010 Guidelines, should be whether the merged firm 
will be able to impose worse terms on its trading partners; and (3) the 
Commission should distinguish between mergers that are likely to create 
or enhance monopsony power and those mergers where the presence of 
seller market power in an upstream market may serve as an opposing 
force to buyer market power in a downstream market, which may be 
procompetitive in some circumstances.\73\ Similarly, FTC Staff argues 
that the Commission should take into account sections 8 and 12 of the 
2010 Guidelines, which relate to powerful buyers and monopsony power. 
FTC Staff explains that section 8 relates to the ability of powerful 
buyers to forestall the adverse competitive effects flowing from a 
merger and that, under this section, the Antitrust Agencies examine the 
choices available to such buyers, how these choices would change due to 
the merger, and whether the negotiating strength of some buyers impact 
the competitive effects of a merger on other buyers. FTC Staff further 
explains that section 12 of the 2010 Guidelines addresses the 
competitive effects of mergers of competing buyers and focuses on 
alternatives available to suppliers when a merger reduces the number of 
buyers.\74\
---------------------------------------------------------------------------

    \73\ AAI Comments at 22-23.
    \74\ FTC Staff Comments at 8.
---------------------------------------------------------------------------

    32. AAI, FTC Staff, APPA, and NRECA urge the Commission to analyze 
partial acquisitions in a manner consistent with the 2010 Guidelines. 
In particular, AAI contends that, in light of the 2010 Guidelines' 
discussion of partial acquisitions, the Commission should revise its 
analysis to ensure that the Commission fully considers the potential 
adverse effects of partial ownership by avoiding bright-line tests, 
evaluating any evidence that would help establish a competitive concern 
surrounding the transaction, and, if evidence points to a potential 
competitive concern, determining the degree to which the private 
investor at issue will have control, participation, or other influence 
over decisions that affect competitive strategy.\75\ Similarly, FTC 
Staff notes that the 2010 Guidelines indicate that the Antitrust 
Agencies will consider all ways in which a partial acquisition may 
affect competition and focus in particular on the acquiring party's 
influence over the competitive conduct of the firm, reductions in the 
incentives of the acquiring and target firms to compete with each 
other, and access by the acquiring firm to non-public information.\76\ 
Likewise, APPA and NRECA argue that the Commission should revise Part 
33 of its regulations to require section 203 applications involving 
partial acquisitions to address the three potential adverse competitive 
effects identified in section 13 of the 2010 Guidelines and should 
require applicants to demonstrate that the acquisitions do not present 
these anti-competitive concerns or to propose mitigation measures.\77\
---------------------------------------------------------------------------

    \75\ AAI Comments at 20-21.
    \76\ FTC Staff Comments at 9.
    \77\ APPA and NRECA Comments at 25.
---------------------------------------------------------------------------

    33. FTC Staff also argues that the Commission should consider 
embracing aspects of the 2010 Guidelines addressing the competitive 
effects of entry and efficiencies. FTC Staff explains that the 2010 
Guidelines recognize that easy, rapid, and substantial entry into the 
relevant market could discipline market power and that efficiencies 
generated by a merger could enhance competition by spurring innovation, 
reducing costs, or improving quality. FTC Staff notes, however, that it 
expects that, given the characteristics of the energy industry, 
reliance on entry to address adverse competitive effects will be rare 
and that efficiencies of a merger should only carry weight to the 
extent that they would not be achieved absent the merger.\78\
---------------------------------------------------------------------------

    \78\ FTC Staff Comments at 8.
---------------------------------------------------------------------------

3. Commission Determination
    34. After carefully considering the comments that were submitted, 
the Commission has decided to retain its existing approach for 
analyzing horizontal market power under section 203 of the FPA. More 
specifically, and as further discussed below, the Commission will 
retain the five-step framework for assessing the competitive effects of 
a proposed transaction, with the first step consisting of the 
Competitive Analysis Screen, because we find that the approach remains 
useful in determining whether a merger will have an adverse impact on 
competition.
    35. As the Commission has previously stated, the Competitive 
Analysis Screen is intended to provide a standard, generally 
conservative check to allow the Commission, applicants, and intervenors 
to quickly identify mergers that are unlikely to present competitive 
problems.\79\ Based on the comments that

[[Page 10498]]

we have received, we believe that the Competitive Analysis Screen 
remains an important tool for evaluating mergers on the basis of their 
effect on market structure and performance while also providing 
analytic and procedural certainty to industry at a relatively low cost.
---------------------------------------------------------------------------

    \79\ Revised Filing Requirements Under Part 33 of the 
Commission's Regulations, Order No. 642, FERC Stats. & Regs. ] 
31,111, at 31,879 (2000) (Filing Requirements Rule), order on reh'g, 
Order No. 642-A, 94 FERC ] 61,289 (2001).
---------------------------------------------------------------------------

    36. While several commenters argue that the Commission is overly 
rigid in its application of the Competitive Analysis Screen, we believe 
that the current approach is flexible enough to incorporate theories 
set forth in the 2010 Guidelines, while still retaining the certainty 
that the current approach provides. The Commission has previously made 
clear that it will consider other evidence of anticompetitive effects 
beyond HHI. As noted above, in the Merger Policy Statement the 
Commission stated that questions about whether the screen has 
accurately captured market power arising from a merger may be raised 
through interventions and by Commission staff.\80\ The Commission 
reaffirmed this policy in the Filing Requirements Rule\81\ and the 
Supplemental Policy Statement. In the Filing Requirements Rule, the 
Commission clarified that applicants with screen failures could address 
market conditions beyond the change in HHI ``such as demand and supply 
elasticity, ease of entry and market rules, as well as technical 
conditions, such as the types of generation involved,'' \82\ and 
identified four factors it would consider if a merger applicant fails 
the Competitive Analysis Screen.\83\ In the Supplemental Policy 
Statement, the Commission stated that it will consider a case-specific 
theory of competitive harm, which includes, but is not limited to, an 
analysis of the merged firm's ability and incentive to withhold output 
in order to drive up prices. The Commission added that it would 
consider theories of competitive harm raised by intervenors, even if an 
applicant passes the Competitive Analysis Screen.\84\
---------------------------------------------------------------------------

    \80\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,119.
    \81\ Filing Requirements Rule, FERC Stats. & Regs. ] 31,111 at 
31,897.
    \82\ Id.
    \83\ Id. at 31,898. The four factors listed by the Commission 
are: (1) The potential adverse competitive effects of the merger; 
(2) whether entry by competitors can deter anticompetitive behavior 
or counteract adverse competitive effects; (3) the effects of 
efficiencies that could not be realized absent the merger; and (4) 
whether one or both of the merging firms is failing and, absent the 
merger, the failing firm's assets would exit the market.
    \84\ Supplemental Policy Statement, FERC Stats. & Regs. ] 31,253 
at P 60, 65.
---------------------------------------------------------------------------

    37. Not only has the Commission stated that it will look beyond the 
HHI screens, the Commission has done so in practice. For example, in 
FirstEnergy Corp, the Commission found that a proposed merger would not 
have an adverse effect on horizontal competition despite three screen 
failures because these failures occurred in off-peak periods during 
which the applicants had a relatively low market share.\85\ In 
addition, in response to commenters that argued that the applicants' 
proposal would provide the applicants with the ability and incentive to 
raise prices, the Commission considered the fact that any withholding 
strategy could be detected by the relevant market monitor and that the 
Commission had previously found that companies would not be able to 
profitably withhold output where the generating units at issue are 
baseload units.\86\ In National Grid, the Commission found that a 
proposed transaction would not have an adverse impact on competition, 
despite the presence of screen failures, because the applicants lacked 
the ability to withhold output due to provider of last resort 
obligations and to the applicants' obligations under long-term power 
sale agreements in the relevant geographic markets.\87\
---------------------------------------------------------------------------

    \85\ FirstEnergy Corp, 133 FERC ] 61,222, at P 49 (2010).
    \86\ Id. P 50.
    \87\ National Grid, plc, 117 FERC ] 61,080, at P 26-28 (2006).
---------------------------------------------------------------------------

    38. Given this flexibility and the benefits of the Competitive 
Analysis Screen, we decline to adopt the 2010 Guidelines as the 
framework for the Commission's analysis of horizontal market power. We 
reiterate, however, that the Commission may consider arguments that a 
proposed transaction raises competitive concerns that have not been 
captured by the Competitive Analysis Screen. Likewise, while applicants 
must continue to provide a Competitive Analysis Screen, we will also 
consider any alternative methods or factors, if adequately supported. 
Further, we note that the Commission has various procedural methods to 
obtain additional information where appropriate.\88\
---------------------------------------------------------------------------

    \88\ See, e.g., 18 CFR 33.10 (2011) (stating that the ``Director 
of the Office of Energy Market Regulation * * * may, by letter, 
require the applicant to submit additional information as is needed 
for analysis of an application filed under this part'').
---------------------------------------------------------------------------

    39. In addition, the Commission declines to adopt the HHI 
thresholds contained in the 2010 Guidelines. As the Commission has 
previously stated, the Competitive Analysis Screen is intended to be 
``conservative enough so that parties and the Commission can be 
confident that an application that clears the screen would have no 
adverse effect on competition.'' \89\ In light of the purpose of the 
Competitive Analysis Screen, we agree with commenters who state that 
more stringent thresholds are appropriate, especially given the 
distinctive characteristics of electricity markets. We also agree with 
commenters that it is an inappropriate application of the 2010 
Guidelines to selectively incorporate the HHI thresholds from the 2010 
Guidelines without other aspects and that doing so could undermine the 
Commission's ability to accurately assess the competitive effects of a 
merger. While a number of commenters claim that the Commission should 
adopt the 2010 Guidelines' HHI thresholds because the thresholds 
reflect the experience of the Antitrust Agencies, we note that the 
Antitrust Agencies administer antitrust law across multiple industries. 
In contrast, the Commission has extensive experience with electrical 
markets and shapes its analysis to reflect the realities of those 
markets. Based on that experience, we will retain the current HHI 
thresholds.
---------------------------------------------------------------------------

    \89\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,119.
---------------------------------------------------------------------------

    40. With respect to the PPL Companies' request that we clarify the 
calculation of SILs, we note that the Commission recently issued an 
order providing further direction and clarification on the performance 
and reporting of such studies in connection with market-based rate 
filings.\90\ The Commission believes that the direction provided in 
that order can also assist with the preparation of SIL studies for 
section 203 purposes and ensure that applicants have the guidance 
necessary to prepare SIL studies consistent with the Commission's 
requirements. At present, we see no need to modify the requirements 
with respect to the preparation of SIL studies. Our experience is that 
studies that are performed consistently with the Commission's current 
requirements provide reasonably accurate and conservative estimates of 
the supply of electricity that can be simultaneously imported into a 
given geographic market.
---------------------------------------------------------------------------

    \90\ See Puget Sound Energy, Inc., 135 FERC ] 61,254 (2011).
---------------------------------------------------------------------------

    41. With regard to the 2010 Guidelines' analysis of partial 
acquisitions and minority ownership we note that the Commission's 
existing approach to control is not contrary to the approach set out in 
the 2010 Guidelines. For instance, the Commission has found that a 
minority

[[Page 10499]]

interest can confer control over the acquired company and has 
conditioned its approval of such transactions on restrictions limiting 
the ability to exercise control.\91\ The Commission has also imposed 
certain restrictions on information sharing as a condition of its 
approval under section 203 in order to remedy competitive concerns 
arising from a partial acquisition.\92\ We also note that issues 
relating to partial acquisitions are among the issues before the 
Commission in Docket No. RM09-16-000.\93\
---------------------------------------------------------------------------

    \91\ See Entegra Power Group, LLC, 125 FERC ] 61,143, at P 40 
(2008) (imposing conditions to prevent possible control of multiple 
public utilities in the same relevant geographic market through the 
acquisition of minority ownership interests that would create market 
power).
    \92\ See Mach Gen, LLC, 127 FERC ] 61,127, at P 37 (2009) 
(conditioning approval of a partial acquisition on the commitment to 
not share information regarding (a) planned maintenance windows, (b) 
outages, (c) marketing strategies, (d) contracts, (e) volumes, (f) 
prices, or (g) other operational data).
    \93\ Control and Affiliation NOPR, FERC Stats. & Regs. ] 32,650.
---------------------------------------------------------------------------

    42. Turning to the suggestion that the Commission should 
incorporate the 2010 Guidelines' discussion of monopsony power, we note 
that in the Merger Policy Statement the Commission stated that ``an 
analysis of monopsony power should be developed if appropriate'' and 
that ``[l]ong-term purchases and sales data for interconnected entities 
* * * could be used to assess buyer concentration in the same way that 
seller concentration is calculated.'' \94\ The Commission left open the 
possibility that buyer market power created by a merger may need to be 
evaluated to find that a transaction is consistent with the public 
interest. As we have done in the past,\95\ we will continue to consider 
the issue of buyer market power on a case-by-case basis.
---------------------------------------------------------------------------

    \94\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at P 
80.
    \95\ See NSTAR, 136 FERC ] 61,016, at P 51-52 (2011).
---------------------------------------------------------------------------

    43. We note that, while Dr. Morris asks the Commission to clarify 
that it will consider alternative relevant markets that are created by 
regional and local constraints, the Commission has previously done so 
when provided with evidence in support of the existence of such a 
market. The Commission will remain flexible in its approach and will 
reevaluate whether a previously recognized submarket continues to exist 
if the evidence shows that the persistent transmission constraints that 
led to the recognition of that submarket are no longer present. We 
clarify that we will not require applicants to submit a DPT for an 
identified submarket if the applicants do not have overlapping 
generation within the submarket and lack firm transmission rights to 
import capacity into that market.
    44. With respect to commenters' suggestions that the Commission use 
actual operational data in defining markets or that the Commission 
should consider opportunity costs in market definition, we are not 
persuaded to require section 203 applicants to provide that information 
on a generic basis. While we recognize that the Commission's current 
methodology may not precisely capture market conditions in all 
circumstances, we continue to believe that the DPT provides an 
appropriate method for determining suppliers in a market and is a well-
established test for the electric industry. Further, we are concerned 
that information about actual market information may not be equally 
available to all applicants and, therefore, will not require all 
applicants to craft their analyses using such data. Nevertheless, the 
Commission will consider adequately supported alternative analyses 
based on such data.
    45. Regarding AAI's request that the Commission formally coordinate 
with the Antitrust Agencies, we note that Commission staff has had 
discussions with staff from the Antitrust Agencies regarding several 
mergers.\96\ We acknowledge that coordination is valuable and will 
continue to coordinate with staff from the Antitrust Agencies in the 
future, as appropriate, on a case-by-case basis. Accordingly, we find 
no need to initiate a more formal coordination procedure with the 
Antitrust Agencies. Further, we will decline to initiate further formal 
general inquiry into the procedure for merger review, the modeling 
methods used and data sources relied upon in those models, or the 
hypothetical results that may arise if the Commission had relied on 
alternative methodology. However, the Commission may perform any of the 
above inquiries on a case-by-case basis.
---------------------------------------------------------------------------

    \96\ See Duke Energy Corp., Notice of Proposed Communication 
with Department of Justice, 135 FERC ] 61,213, (2011); Exelon 
Corporation, Notice of Proposed Communication with Department of 
Justice, 136 FERC ] 61,161 (2011).
---------------------------------------------------------------------------

    46. Additionally, we will decline to adopt the PPL Companies' 
suggestion to modify our analysis to focus exclusively on available 
economic capacity. We believe that both the economic capacity and 
available economic capacity measures remain useful. While we have 
acknowledged that one measure may be more relevant in certain 
circumstances, we continue to believe that requiring applicants to 
provide analyses using both economic capacity and available economic 
capacity will ensure that the Commission has a more complete record on 
which to make its determination of whether the proposed transaction 
will have an adverse effect on competition.\97\
---------------------------------------------------------------------------

    \97\ Kansas City Power and Light Co., 113 FERC ] 61,074 at P 30-
32, 35 (2005).
---------------------------------------------------------------------------

B. Electric Market-Based Rate Program

1. Comments in Support of Retaining the Current Analysis
    47. TAPS, TDU Systems, APPA, and NRECA support retaining the 
Commission's current analysis because the Commission's analysis of HHI 
is already consistent with the 2010 Guidelines and the Commission does 
not yet have sufficient experience with the existing standards to 
warrant changing its analysis.\98\ APPA and NRECA add that the 
Commission's analysis of horizontal market power in its electric 
market-based rate program is not directly tied to the Antitrust 
Agencies' merger guidelines and there is no evidence that the 
thresholds used by the Commission are too high and are denying market-
based rate authority to public utilities that should have it.\99\ 
Similarly, TAPS and TDU Systems state that there is no reason to change 
the Commission's threshold for the market share screen and that the 
2010 Guidelines actually discard the presumption that merging firms are 
significant direct competitors if their combined market share is at 
least 35 percent in recognition of the fact that a merger can present 
market power concerns even if the market share of the combined 
companies is less than 35 percent.\100\
---------------------------------------------------------------------------

    \98\ TAPS and TDU Systems Comments at 12-14; APPA and NRECA 
Comments at 26-28.
    \99\ APPA and NRECA Comments at 28.
    \100\ TAPS and TDU Systems Comments at 12-13.
---------------------------------------------------------------------------

    48. Additionally, Monitoring Analytics, ELCON, and NASUCA state 
that the thresholds for the market share, pivotal supplier, and market 
concentration analyses remain appropriate because the electricity 
markets are still characterized by significant barriers to entry, 
limited substitutes, lack of storage, and inelastic demand.\101\ 
Modesto believes that the continued application of the Commission's 
current market-based rate analysis will better protect consumers than 
embracing the 2010 Guidelines.\102\ Finally, EPSA states that the 
Commission should refrain from adopting the 2010 Guidelines' analysis 
of partial acquisitions and minority ownership.
---------------------------------------------------------------------------

    \101\ Monitoring Analytics Comments at 8-9; ELCON and NASUCA 
Comments at 5-6.
    \102\ Modesto Comments at 4-5.

---------------------------------------------------------------------------

[[Page 10500]]

2. Comments in Support of Modifying the Current Analysis
    49. AAI maintains that the Commission should consider bringing its 
market-based rate analysis in line with the 2010 Guidelines for the 
same reasons that it argues the Commission should conform its analysis 
under section 203 to the 2010 Guidelines. AAI argues that there are a 
number of problems with the indicative screens that challenge the goal 
of consistent and transparent competition policy. Specifically, AAI 
states that both the pivotal supplier and market share screens address 
unilateral effects scenarios, which ignore the complex dynamics among 
firms in oligopoly markets that determine price and output levels, and 
are bright-line tests that determine whether an applicant is presumed 
to have market power as opposed to whether the firm has the ability and 
incentive to exercise it.\103\
---------------------------------------------------------------------------

    \103\ AAI Comments at 25-26.
---------------------------------------------------------------------------

    50. FTC Staff states that the same types of information that are 
discussed in the 2010 Guidelines are useful in the determination of 
whether a supplier already has market power, although the inquiry may 
be somewhat different than in the merger context. FTC Staff states that 
market definition in a non-merger matter seeks to identify customer 
alternatives at the competitive price. According to FTC Staff, a 
failure to ensure that customer alternatives are analyzed at the 
competitive price can result in a serious error, such as defining the 
market too broadly if customers are searching more widely for 
alternatives in response to an already supracompetitive price. FTC 
Staff claims that the proper application of the 2010 Guidelines in the 
context of market-based rate reviews will help avoid such errors.\104\
---------------------------------------------------------------------------

    \104\ FTC Staff Comments at 10.
---------------------------------------------------------------------------

    51. Dr. Morris contends that the wholesale market share screen is 
flawed, as approximately 75 percent of traditionally vertically-
integrated utilities outside of an RTO fail the screen in their own 
balancing authority area regardless of the competitive conditions in 
that area. Accordingly, he recommends replacing the wholesale market 
share screen for utilities outside of RTOs or, in the alternative, 
allowing applicants that fail the wholesale market share screen to 
conduct a screen comparing the wholesale load to be served during the 
next three years in a market to the number of available suppliers in 
the area. He states that the Commission would need to specify the 
number of suppliers that are necessary to obtain workably competitive 
prices and would grant market-based rate authority if there are a 
sufficient number of suppliers. He notes that his own research has 
indicated that three suppliers are sufficient to drive competitive 
rates down to the level achieved by cost-based regulation.\105\
---------------------------------------------------------------------------

    \105\ Morris Comments at 28-30.
---------------------------------------------------------------------------

    52. EPSA argues that the Antitrust Agencies' decision to increase 
the HHI thresholds contained in the 2010 Guidelines warrants a 
corresponding increase in the threshold used for the wholesale market 
share indicative screen from 20 percent to 30 percent, or, at the very 
least, to 25 percent. EPSA claims that the Antitrust Agencies' decision 
to increase the HHI threshold from 1,800 to 2,500 has eliminated the 
basis for the Commission's objections to the use of a market share 
threshold higher than 20 percent. EPSA states that any further proposed 
changes to the Commission's market-based rate analysis should be 
explored in depth in a separate proceeding or supplemental NOI.\106\
---------------------------------------------------------------------------

    \106\ EPSA Comments at 13-16.
---------------------------------------------------------------------------

    53. The PPL Companies state that the Commission should not modify 
the indicative screens, but state that there are some aspects of the 
reforms adopted in the 2010 Guidelines that would merit consideration 
where there has been an initial screen failure, such as a fact-specific 
analysis of relevant markets, a focus on available economic capacity, 
and any reforms the Commission adopts for the determination of SILs in 
the section 203 context.\107\
---------------------------------------------------------------------------

    \107\ PPL Companies Comments at 24-26.
---------------------------------------------------------------------------

3. Other Issues
    54. Mr. Reutter argues that, if the Commission modifies its market-
based rate analysis to reflect the HHI thresholds contained in the 2010 
Guidelines, the Commission should adopt the same criteria for gas 
storage facilities that request market-based rate authority.\108\
---------------------------------------------------------------------------

    \108\ Reutter Comments at 1-2.
---------------------------------------------------------------------------

4. Commission Determination
    55. The Commission will not modify the current market power 
analysis utilized for electric market-based rate applications to 
reflect the 2010 Guidelines.\109\ The Commission's market-based rate 
analysis is not explicitly tied to the Antitrust Agencies' merger 
guidelines and commenters fail to identify any feature within those 
guidelines that warrant a change to the program. We note that the HHI 
threshold used by the Commission in the market-based rate analysis 
(2,500) is already consistent with the thresholds recently adopted in 
the Antitrust Agencies' 2010 Guidelines (also 2,500).
---------------------------------------------------------------------------

    \109\ Since the Commission is not modifying its market-based 
rate analysis to reflect the HHI thresholds contained in the 2010 
Guidelines, Mr. Reuter's request that if we did make such a change 
we adopt the same criteria for gas storage facilities that request 
market-based rate authority is moot.
---------------------------------------------------------------------------

    56. With respect to the use of the indicative screens, we will 
retain the current thresholds. While EPSA argues that the Antitrust 
Agencies' decision to raise the threshold for a highly concentrated 
market undercuts the Commission's reasoning in retaining the existing 
threshold for the market share screen, we disagree. In Order No. 697, 
the Commission found that a conservative approach at the indicative 
screen stage of the Commission's analysis is appropriate because a 
seller is presumed not to possess horizontal market power if the seller 
passes both of the screens.\110\ The Commission has found that a 20 
percent threshold is appropriate because a firm with a 20 percent 
market share is not likely to be a ``fringe'' firm that is not a 
significant factor in the market,\111\ and in markets characterized by 
relatively low elasticity of demand, such as markets for electricity, 
market power is more likely to be present at lower market shares than 
in markets with high demand elasticity.\112\ As the Commission has 
noted in the past, the 20 percent threshold strikes the appropriate 
balance between having a conservative but realistic screen and imposing 
undue regulatory burdens.\113\ Thus, while the Commission mentioned the 
1992 Guidelines in its discussion in Order No. 697, the Antitrust 
Agencies' decision to modify its thresholds does not warrant a 
concomitant change to the market share screen in the Commission's 
electric market-based rate program, as the Commission's reasoning was 
tied to the nature of the Commission's review of market-based rate 
filings and the physical and economic characteristics of markets for 
electricity. Also, while EPSA points to a recent Commission order\114\ 
as support for the idea that the 20 percent threshold is too low and 
results in ``false positives,'' EPSA fails to point to anything in that 
order that shows that the indicative screens resulted in a ``false 
positive'' and that the applicants'

[[Page 10501]]

filing did not warrant further scrutiny and the consideration of 
additional evidence.
---------------------------------------------------------------------------

    \110\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 89.
    \111\ AEP Power Marketing, Inc., 108 FERC ] 61,026, at P 96 
(2004).
    \112\ Id.; Order No. 697, FERC Stats. & Regs. ] 31,252 at P 89.
    \113\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 90-91.
    \114\ BE Louisiana, LLC, 132 FERC ] 61,118 (2010).
---------------------------------------------------------------------------

    57. The Commission disagrees with AAI's assertion that the 
indicative screens are flawed because they focus only on unilateral 
effects. While the pivotal supplier screen focuses on the ability of a 
seller to exercise market power unilaterally, as the Commission 
observed in Order No. 697, the market share screen focuses on both 
``unilateral market power and the ability of a seller to effect 
coordinated interaction with other sellers.'' \115\ Additionally, while 
AAI criticizes the screens on the basis that they do not focus on the 
ability and incentive to exercise market power, the Commission has 
previously found and reiterates here that requiring sellers to submit 
screens that focus on the sellers' potential (i.e., ability) to 
exercise market power is consistent with the Commission's obligation to 
set policies that ensure that rates remain just and reasonable.\116\
---------------------------------------------------------------------------

    \115\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 65.
    \116\ Id. P 70; see also Westar Energy, Inc., 123 FERC ] 61,123 
at P 22 (2008).
---------------------------------------------------------------------------

    58. Further, with respect to Dr. Morris's argument that the 
Commission should modify the market share screen because traditional 
vertically-integrated utilities outside of an RTO typically fail the 
screen, we note that Dr. Morris does not provide evidentiary support 
for this claim. Moreover, the Commission addressed and rejected a 
similar claim in the Order No. 697 proceeding.\117\ Additionally, even 
assuming that Dr. Morris's assertion is accurate, the fact that a 
particular class of market participant often fails the market share 
screen does not mean that the screen is flawed. The screen is intended 
to be a conservative measure to identify those sellers that may raise 
market power concerns and merit additional scrutiny; it is not intended 
to ensure that a particular class of market participant routinely 
passes the Commission's analysis. Moreover, the alternative analysis 
that Dr. Morris proposes is a contestable load analysis, which the 
Commission has previously rejected.\118\ There is no evidence that 
market conditions have changed such that the Commission should now 
accept this analysis.
---------------------------------------------------------------------------

    \117\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 82, 93 
(rejecting the argument that a threshold of 20 percent was 
inappropriate due to the fact it is difficult for investor-owned 
utilities outside of RTOs/ISOs to fall below the threshold because 
the Commission already allowed applicants to deduct native load and 
had decided elsewhere in the order to increase the permissible 
deduction).
    \118\ See, e.g., id. P 66-67.
---------------------------------------------------------------------------

    59. As far as the suggestion that the Commission should consider 
fact-specific evidence of competitive harm or that the Commission 
should consider additional evidence when determining the relevant 
geographic market, we believe that the Commission's current analysis 
provides adequate flexibility to consider such arguments when raised by 
an applicant or an intervenor. The Commission has stated that an 
applicant that fails one of the indicative screens may submit 
alternative evidence, including a DPT or actual historical sales data, 
to rebut the presumption of market power. Thus, to the extent that an 
applicant has additional evidence regarding the competitive situation 
in a market, it is free to present that to the Commission and the 
Commission will consider that evidence on a case-by-case basis.\119\ 
The Commission has further stated that intervenors may present 
alternative evidence, such as historical sales or transmission data, to 
support or rebut the results of the indicative screens.\120\ In 
addition, in Order No. 697, the Commission stated that it would 
continue to allow sellers and intervenors on a case-by-case basis to 
show that some other geographic market should be considered as the 
relevant market in a particular case.
---------------------------------------------------------------------------

    \119\ See, e.g., Dogwood Energy, LLC, 135 FERC ] 61,089 (2011); 
Shell Energy North America (US), L.P., 135 FERC ] 61,090 (2011).
    \120\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 70; see, 
e.g., AEP Power Marketing, Inc., 124 FERC ] 61,274, at P 34-36 
(2008).
---------------------------------------------------------------------------

    The Commission orders:
    The proceeding in Docket No. RM11-14-000 is hereby terminated.

    Dated: February 16, 2012.

    By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.

Appendix A: List of Commenters

------------------------------------------------------------------------
         Short name or acronym                      Commenter
------------------------------------------------------------------------
AAI....................................  American Antitrust Institute.
APPA...................................  American Public Power
                                          Association.
Berkeley...............................  Carl Danner, Henry Kahwaty,
                                          Keith Reutter, and Cleve Tyler
                                          of the Berkeley Research
                                          Group.
Brattle Group..........................  Romkaew Broehm, Peter Fox-
                                          Penner, Oliver Grawe, and
                                          James Reitzes of The Brattle
                                          Group.
Cavicchi...............................  A. Joseph Cavicchi.
EEI....................................  Edison Electric Institute.
ELCON..................................  Electricity Consumers Resource
                                          Council.
EPSA...................................  Electric Power Supply
                                          Association.
Entergy................................  Entergy Services, Inc.
FTC Staff..............................  Staff of the Federal Trade
                                          Commission.
Modesto................................  Modesto Irrigation District.
Monitoring Analytics...................  Monitoring Analytics, LLC.
Morris.................................  Dr. John Morris.
NASUCA.................................  National Association of State
                                          Utility Consumer Advocates.
NARECA.................................  National Rural Electric
                                          Cooperative Association.
New York Commission....................  New York State Public Service
                                          Commission.
PPL Companies..........................  PPL Electric Utilities
                                          Corporation; Louisville Gas &
                                          Electric Company; Kentucky
                                          Utilities Company; LG&E Energy
                                          Marketing, Inc.; PPL
                                          EnergyPlus, LLC; PPL Brunner
                                          Island, LLC; PPL Holtwood,
                                          LLC; PPL Martins Creek, LLC;
                                          PPL Montour, LLC; PPL
                                          Susquehanna, LLC; Lower Mount
                                          Bethel Energy, LLC; PPL New
                                          Jersey Solar, LLC; PPL New
                                          Jersey Biogas, LLC; PPL
                                          Renewable Energy, LLC; PPL
                                          Montana, LLC; PPL Colstrip I,
                                          LLC; and PPL Colstrip II, LLC.
Reutter................................  Keith Reutter.
TAPS...................................  Transmission Access Policy
                                          Study Group.
TDU Systems............................  Transmission Dependent Utility
                                          Systems.
------------------------------------------------------------------------

[FR Doc. 2012-4050 Filed 2-21-12; 8:45 am]
BILLING CODE 6717-01-P


