[Federal Register Volume 77, Number 35 (Wednesday, February 22, 2012)]
[Notices]
[Pages 10492-10501]
[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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    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

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

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

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

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

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

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.

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

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'

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