[Federal Register: July 20, 2007 (Volume 72, Number 139)]
[Rules and Regulations]
[Page 39903-40046]
[DOCID:fr20jy07-12]

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

Part II

Department of Energy

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

 Federal Energy Regulatory Commission

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

18 CFR Part 35

Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and
Ancillary Services by Public Utilities; Final Rule

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

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM04-7-000; Order No. 697]

Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities

Issued June 21, 2007.
AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Final rule.

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

SUMMARY: The Federal Energy Regulatory Commission (Commission) is
amending its regulations to revise Subpart H to Part 35 of Title 18 of
the Code of Federal Regulations governing market-based rates for public
utilities pursuant to the Federal Power Act (FPA). The Commission is
codifying and, in certain respects, revising its current standards for
market-based rates for sales of electric energy, capacity, and
ancillary services. The Commission is retaining several of the core
elements of its current standards for granting market-based rates and
revising them in certain respects. The Commission also adopts a number
of reforms to streamline the administration of the market-based rate
program.

DATES: Effective Date: This rule will become effective September 18,
2007.

FOR FURTHER INFORMATION CONTACT:
Debra A. Dalton (Technical Information), Office of Energy Markets and
Reliability, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426,<PHONE_NUMBER>.
Elizabeth Arnold (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

                            Table of Contents

                                                              Paragraph
                                                                 Nos.

I. Introduction............................................            1
II. Background.............................................            7
III. Overview of Final Rule................................           12
IV. Discussion.............................................           33
    A. Horizontal Market Power.............................           33
        1. Whether to Retain the Indicative Screens........           33
        2. Indicative Market Share Screen Threshold Levels            80
         and Pivotal Supplier Application Period...........
            a. Market Share Threshold......................           82
            b. Pivotal Supplier Application Period.........           94
        3. DPT Criteria....................................           96
        4. Other Products and Models.......................          118
        5. Native Load Deduction...........................          125
            a. Market Share Indicative Screen..............          125
            b. Pivotal Supplier Indicative Screen..........          143
            c. Clarification of Definition of Native Load..          150
            d. Other Native Load Concerns..................          153
        6. Control and Commitment..........................          156
            a. Presumption of Control......................          164
            b. Requirement for Sellers to have a Rate on             212
             File..........................................
        7. Relevant Geographic Market......................          215
            a. Default Relevant Geographic Market..........          215
             b. NERC's Balancing Authority Area and Default          247
             Geographic Area...............................
            c. Additional Guidelines for Alternative                 253
             Geographic Market and Flexibility.............
            d. Specific Issues Related to Power Pools and            279
             SPP...........................................
            e. RTO/ISO Exemption...........................          285
        8. Use of Historical Data..........................          292
        9. Reporting Format................................          302
        10. Exemption for New Generation (Formerly Section           307
         35.27(a) of the Commission's Regulations).........
            a. Elimination of Exemption in Section 35.27(a)          307
            b. Grandfathering..............................          327
            c. Creation of a Safe Harbor...................          335
        11. Nameplate Capacity.............................          339
        12. Transmission Imports...........................          346
            a. Use of Historical Conditions and OASIS                348
             Practices.....................................
            b. Use of Total Transfer Capability (TTC)......          363
            c. Accounting for Transmission Reservations....          365
            d. Allocation of Transmission Imports based on           370
             Pro Rata Shares of Seller's Uncommitted
             Generation Capacity...........................
            e. Miscellaneous Comments......................          376
            f. Required SIL Study for DPT Analysis.........          382
        13. Procedural Issues..............................          387
    B. Vertical Market Power...............................          397
        1. Transmission Market Power.......................          400
            a. OATT Requirement............................          403
            b. OATT Violations and MBR Revocation..........          411
            c. Revocation of Affiliates' MBR Authority.....          422
        2. Other Barriers to Entry.........................          428
        3. Barriers Erected or Controlled by Other Than The          452
         Seller............................................
        4. Planning and Expansion Efforts..................          454
        5. Monopsony Power.................................          459
    C. Affiliate Abuse.....................................          464
        1. General Affiliate Terms and Conditions..........          464

            a. Codifying Affiliate Restrictions in                   464
             Commission Regulations........................
            b. Definition of ``Captive Customers''.........          469
            c. Definition of ``Non-Regulated Power Sales             484
             Affiliate''...................................
            d. Other Definitions...........................          496
            e. Treating Merging Companies as Affiliates....          499
            f. Treating Energy/Asset Managers as Affiliates          503
            g. Cooperatives................................          518
        2. Power Sales Restrictions........................          529
        3. Market-Based Rate Affiliate Restrictions                  544
         (formerly Code of Conduct) for Affiliate
         Transactions Involving Power Sales and Brokering,
         Non-Power Goods and Services and Information
         Sharing...........................................
            a. Uniform Code of Conduct/Affiliate                     546
             Restrictions--Generally.......................
            b. Exceptions to the Independent Functioning             553
             Requirement...................................
            c. Information Sharing Restrictions............          570
            d. Definition of ``Market Information''........          590
            e. Sales of Non-Power Goods or Services........          595
            f. Service Companies or Parent Companies Acting          599
             on Behalf of and for the Benefit of a
             Franchised Public Utility.....................
    D. Mitigation..........................................          604
        1. Cost-Based Rate Methodology.....................          606
            a. Sales of One Week or Less...................          606
            b. Sales of more than one week but less than             632
             one year......................................
            c. Sales of one year or greater................          658
            d. Alternative methods of mitigation...........          660
        2. Discounting.....................................          699
        3. Protecting Mitigated Markets....................          720
            a. Must Offer..................................          720
            b. First-Tier Markets..........................          776
            c. Sales that Sink in Unmitigated Markets......          794
            d. Proposed Tariff Language....................          825
    E. Implementation Process..............................          832
        1. Category 1 and 2 Sellers........................          836
            a. Establishment of Category 1 and 2 Sellers...          836
            b. Threshold for Category 1 Sellers and Other            845
             Proposed Modifications........................
        2. Regional Review and Schedule....................          869
    F. MBR Tariff..........................................          897
        1. Tariff of General Applicability.................          901
        2. Placement of Terms and Conditions...............          925
        3. Single Corporate Tariff.........................          928
    G. Legal Authority.....................................          938
        1. Whether Market-Based Rates Can Satisfy the Just           938
         and Reasonable Standard Under the FPA.............
        Consistency of Market-based Rate Program with FPA            956
         Filing Requirements...............................
        2. Whether Existing Tariffs Must Be Found to Be              972
         Unjust and Unreasonable, and Whether the
         Commission Must Establish a Refund Effective Date.
    H. Miscellaneous.......................................          975
        1. Waivers.........................................          975
            a. Accounting Waivers..........................          979
            b. Timing......................................          988
            c. Part 34 Waivers Blanket Authorizations......          993
        2. Sellers Affiliated with a Foreign Utility.......         1000
        3. Change in Status................................         1008
            a. Fuel Supplies...............................         1011
            b. Transmission Outages........................         1019
            c. Control.....................................         1027
            d. Triggering Events...........................         1033
            e. Timing of Reporting.........................         1035
            f. Sellers Affiliated with a Foreign Utility...         1040
        4. Third-Party Providers of Ancillary Services.....         1046
            a. Internet Postings and Reporting Requirements         1052
            b. Pricing for Ancillary Services in RTOs/ISOs.         1062
        5. Reactive Power and Real Power Losses............         1072
            a. Reactive Power..............................         1073
            b. Real Power Losses...........................         1075
V. Section-by-Section Analysis of Regulations..............         1077
VI. Information Collection Statement.......................         1105
VII. Environmental Analysis................................         1124
VIII. Regulatory Flexibility Act...........................         1125
IX. Document Availability..................................         1129
X. Effective Date and Congressional Notification...........         1132
Regulatory Text
Appendix A to Subpart H: Standard Screen Format
Appendix B to Subpart H: Corporate Entities and Assets
 sample appendix
Appendix C to the Final Rule: Required Provisions of the
 Market-Based Rate Tariff

Appendix D to the Final Rule: Regions and Schedule for
 Regional Market power Update Process
Appendix E to the Final Rule: List of Commenters and
 Acronyms
Attachment A to the Final Rule: MOELLER, Commissioner,
 dissenting in part

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G.
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

I. Introduction

    1. On May 19, 2006, the Commission issued a Notice of Proposed
Rulemaking (NOPR), pursuant to sections 205 and 206 of the Federal
Power Act (FPA),\1\ in which the Commission proposed to amend its
regulations governing market-based rate authorizations for wholesale
sales of electric energy, capacity and ancillary services by public
utilities. In the NOPR, the Commission proposed to modify all existing
market-based authorizations and tariffs so they would reflect any new
requirements ultimately adopted in the Final Rule. After considering
the comments received in response to the NOPR, the Commission adopts in
many respects the proposals contained in the NOPR, but with a number of
modifications.
---------------------------------------------------------------------------

    \1\ 16 U.S.C. 824d, 824e.
---------------------------------------------------------------------------

    2. This Final Rule represents a major step in the Commission's
efforts to clarify and codify its market-based rate policy by providing
a rigorous up-front analysis of whether market-based rates should be
granted, including protective conditions and ongoing filing
requirements in all market-based rate authorizations, and reinforcing
its ongoing oversight of market-based rates. The specific components of
this rule, in conjunction with other regulatory activities, are
designed to ensure that market-based rates charged by public utilities
are just and reasonable. There are three major aspects of the
Commission's market-based rate regulatory regime.
    3. First is the analysis that is the subject of this rule: whether
a market-based rate seller or any of its affiliates has market power in
generation or transmission and, if so, whether such market power has
been mitigated.\2\ If the seller is granted market-based rates, the
authorization is conditioned on: affiliate restrictions governing
transactions and conduct between power sales affiliates where one or
more of those affiliates has captive customers; a requirement to file
post-transaction electric quarterly reports (EQRs) containing specific
information about contracts and transactions; a requirement to file any
change of status; and a requirement for all large sellers to file
triennial updates.\3\
---------------------------------------------------------------------------

    \2\ The Commission also considers whether the seller or its
affiliates can erect other barriers to entry (e.g., key sites for
building new power supply; key inputs to power supply) in the
relevant market and whether there is evidence of affiliate abuse or
reciprocal dealing.
    \3\ During the past three years, the Commission has initiated
over 20 investigations under section 206 of the FPA because of
concerns of possible market power. Several of those investigations
led to the revocation or voluntary relinquishing of market-based
rate authority and the ordering of refunds by sellers.
---------------------------------------------------------------------------

    4. Second, for wholesale sellers that have market-based rate
authority and sell into day ahead or real-time organized markets
administered by Regional Transmission Organizations (RTOs) and
Independent System Operators (ISOs), they do so subject to specific
RTO/ISO market rules approved by the Commission and applicable to all
market participants. These rules are designed to help ensure that
market power cannot be exercised in those organized markets and include
additional protections (e.g., mitigation measures) where appropriate to
ensure that prices in those markets are just and reasonable. Thus, a
seller in such markets not only must have an authorization based on an
analysis of that individual seller's market power, but it must also
abide by additional rules contained in the RTO/ISO tariffs.
    5. Third, the Commission, through its ongoing oversight of market-
based rate authorizations and market conditions, may take steps to
address seller market power or modify rates. For example, based on its
review of triennial market power updates required of market-based rate
sellers, its review of EQR filings made by market-based rate sellers,
and its review of required notices of change in status, the Commission
may institute a section 206 proceeding to revoke a seller's market-
based rate authorization if it determines that the seller may have
gained market power since its original market-based rate authorization.
The Commission may also, based on its review of EQR filings or daily
market price information, investigate a specific utility or anomalous
market circumstances to determine whether there has been any conduct in
violation of RTO/ISO market rules or Commission orders or tariffs, or
any prohibited market manipulation, and take steps to remedy any
violations. These steps could include, among other things, disgorgement
of profits and refunds to customers if a seller is found to have
violated Commission orders, tariffs or rules, or a civil penalty paid
to the United States Treasury if a seller is found to have engaged in
prohibited market manipulation or to have violated Commission orders,
tariffs or rules.
    6. The Commission recognizes that several recent court decisions by
the United States Court of Appeals for the Ninth Circuit \4\ have
created some uncertainty for sellers transacting pursuant to our
market-based rate program. The cases raise issues with respect to the
circumstances under which sellers' pre-authorized market-based rate
sales may be subject to retroactive refunds and the circumstances under
which buyers might be able to invalidate or modify contracts based on
the argument that the contracts were entered into at a time when
markets were dysfunctional. The Commission's first and foremost duty is
to protect customers from unjust and unreasonable rates; however, we
recognize that uncertainties regarding rate stability and contract
sanctity can have a chilling effect on investments and a seller's
willingness to enter into long-term contracts and this, in turn, can
harm customers in the long run. The Commission recently provided
guidance in this regard, noting that these Ninth Circuit decisions
addressed a unique set of facts and a market-based rate program that
has undergone substantial improvement since 2001, and reiterating that
an ex ante finding of the absence of market power, coupled with the EQR
filing and effective regulatory oversight qualifies as sufficient prior
review for market-based rate contracts to satisfy the notice and filing
requirements of FPA section 205.\5\ Through this Final Rule, the
Commission is clarifying and further

improving its market-based rate program. Moreover, the Commission will
explore ways to continue to improve its market-based rate program and
processes to assure appropriate customer protections but at the same
time provide greater regulatory and market certainty for sellers in
light of the above court opinions.
---------------------------------------------------------------------------

    \4\ See State of California, ex rel. Bill Lockyer v. FERC, 383
F.3d 1006 (9th Cir. 2004), cert. denied (S. Ct. Nos. 06-888 and 06-
1100, June 18, 2007) (Lockyer); Public Utility District No. 1 of
Snohomish County, Washington v. FERC, 471 F.3d 1053 (9th Cir. 2006)
(Snohomish); Public Utilities Commission of the State of California
and California Electric Oversight Board v. FERC, 474 F.3d 587 (9th
Cir. 2007) (California Commission).
    \5\ CAlifornians for Renewable Energy, Inc. v. Cal. Pub. Util.
Com'n, 119 FERC ] 61,058 (2007).
---------------------------------------------------------------------------

II. Background

    7. In 1988, the Commission began considering proposals for market-
based pricing of wholesale power sales. The Commission acted on market-
based rate proposals filed by various wholesale suppliers on a case-by-
case basis. Over the years, the Commission developed a four-prong
analysis used to assess whether a seller should be granted market-based
rate authority: (1) Whether the seller and its affiliates lack, or have
adequately mitigated, market power in generation; (2) whether the
seller and its affiliates lack, or have adequately mitigated, market
power in transmission; (3) whether the seller or its affiliates can
erect other barriers to entry; and (4) whether there is evidence
involving the seller or its affiliates that relates to affiliate abuse
or reciprocal dealing.
    8. The Commission initiated the instant rulemaking proceeding in
April 2004 to consider ``the adequacy of the current analysis and
whether and how it should be modified to assure that prices for
electric power being sold under market-based rates are just and
reasonable under the Federal Power Act.'' \6\ At that time, the
Commission noted that much has changed in the industry since the four-
prong analysis was first developed and posed a number of questions that
would be explored through a series of technical conferences.
---------------------------------------------------------------------------

    \6\ Market-Based Rates for Public Utilities, 107 FERC ] 61,019
AT P 1(2004) (initiating rulemaking proceeding).
---------------------------------------------------------------------------

    9. On April 14, 2004, the Commission issued an order modifying the
then-existing generation market power analysis and its policy governing
market power mitigation, on an interim basis.\7\ The April 14 Order
adopted a policy that provided sellers a number of procedural options,
including two indicative generation market power screens (an
uncommitted pivotal supplier analysis and an uncommitted market share
analysis), and the option of proposing mitigation tailored to the
particular circumstances of the seller that would eliminate the ability
to exercise market power. The order also explained that sellers could
choose to adopt cost-based rates. On July 8, 2004, the Commission
addressed requests for rehearing of the April 14 Order, reaffirming the
basic analysis, but clarifying and modifying certain instructions for
performing the generation market power analysis. Over the next year,
the Commission convened four technical conferences, seeking input
regarding all four prongs of the analysis.
---------------------------------------------------------------------------

    \7\ AEP Power Marketing, Inc., 107 FERC ] 61,018 (April 14
Order), order on reh'g, 108 FERC ] 61,026 (2004) (July 8 Order).
---------------------------------------------------------------------------

    10. On May 19, 2006, the Commission issued a NOPR in this
proceeding.\8\ The Commission explained that refining and codifying
effective standards for market-based rates would help customers by
ensuring that they are protected from the exercise of market power and
would also provide greater certainty to sellers seeking market-based
rate authority.
---------------------------------------------------------------------------

    \8\ Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities, Notice of
Proposed Rulemaking, 71 FR 33102 (Jun. 7, 2006), FERC Stats. & Regs.
] 32,602 (2006) (NOPR).
---------------------------------------------------------------------------

    11. The regulations proposed in the NOPR adopted in most respects
the Commission's existing standards for granting market-based rates,
and proposed to streamline certain aspects of its filing requirements
to reduce the administrative burdens on sellers, customers and the
Commission. The Commission received over 100 comments and reply
comments in response to the NOPR. A list of commenters is attached as
Appendix E.

III. Overview of Final Rule

    12. In this Final Rule, the Commission revises and codifies in the
Commission's regulations the standards for market-based rates for
wholesale sales of electric energy, capacity and ancillary services.
The Commission also adopts a number of reforms to streamline the
administration of the market-based rate program. As set forth below,
the Final Rule adopts in many respects the proposals contained in the
NOPR, but with a number of modifications.

Horizontal Market Power

    13. In this Final Rule, the Commission adopts, with certain
modifications, two indicative market power screens (the uncommitted
market share screen (with a 20 percent threshold) and the uncommitted
pivotal supplier screen), each of which will serve as a cross check on
the other to determine whether sellers may have market power and should
be further examined. Sellers that fail either screen will be rebuttably
presumed to have market power. However, such sellers will have full
opportunity to present evidence (through the submission of a Delivered
Price Test (DPT) analysis) demonstrating that, despite a screen
failure, they do not have market power, and the Commission will
continue to weigh both available economic capacity and economic
capacity when analyzing market shares and Hirschman-Herfindahl Indices
(HHIs).
    14. With regard to control over generation capacity, the Commission
finds that the determination of control is appropriately based on a
review of the totality of circumstances on a fact-specific basis. No
single factor or factors necessarily results in control. The Commission
will require a seller to make an affirmative statement as to whether a
contractual arrangement (energy management agreement, tolling
agreement, specific contractual terms, etc.) transfers control and to
identify the party or parties it believes controls the generation
facility. Regarding a presumption of control, the Commission will
continue its practice of attributing control to the owner absent a
contractual agreement transferring such control, and we provide
guidance as to how we will consider jointly-owned facilities.
    15. The Commission adopts its current approach with regard to the
default relevant geographic market, with some modifications. In
particular, the Commission will continue to use a seller's control area
(balancing authority area) \9\ or the RTO/ISO market, as applicable, as
the default relevant geographic market. However, where the Commission
has made a specific finding that there is a submarket within an RTO,
that submarket becomes the default relevant geographic market for
sellers located within the submarket for purposes of the market-based
rate analysis. The Commission also provides guidance as to the factors
the Commission will consider in evaluating whether, in a particular
case, to adopt an alternative geographic market instead of relying on
the default geographic market.
---------------------------------------------------------------------------

    \9\ As discussed below in the Horizontal Market Power section,
the Commission adopts the use of balancing authority area instead of
control area.
---------------------------------------------------------------------------

    16. The Commission modifies the native load proxy for the market
share screens from the minimum peak day in the season to the average
peak native load, averaged across all days in the season, and clarifies
that native load can only include load attributable to native load
customers based on the definition of native load commitment in Sec.
33.3(d)(4)(i) of the Commission's regulations. In addition, sellers are

given the option of using seasonal capacity instead of nameplate
capacity.
    17. The Commission retains the snapshot in time approach based on
historical data for both the indicative screens and the DPT analysis
and disallows projections to that data. A standard reporting format is
adopted for sellers to follow when summarizing their analysis.
    18. The Commission modifies the treatment of newly constructed
generation and adopts an approach that requires all sellers to perform
a horizontal analysis for the grant of market-based rate authority.
    19. With regard to simultaneous transmission import limit studies
(SILs), the Commission adopts the requirement that the SIL study be
used as a basis for transmission access for both the indicative screens
and the DPT analysis. Further, the Commission clarifies that the SIL
study as shown in Appendix E of the April 14 Order is the only study
that meets our requirements. The Commission provides guidance regarding
how to perform the SIL study, including accounting for specific OASIS
practices.
    20. Finally, the Commission adopts procedures under which
intervenors in section 205 proceedings may obtain expedited access to
Critical Energy Infrastructure Information (CEII) or other information
for which privileged treatment is sought.

Vertical Market Power

    21. With regard to vertical market power and, in particular,
transmission market power, the Commission continues the current policy
under which an open access transmission tariff (OATT) is deemed to
mitigate a seller's transmission market power. However, in recognition
of the fact that OATT violations may nonetheless occur, the Commission
states that a finding of a nexus between the specific facts relating to
the OATT violation and the entity's market-based rate authority may
subject the seller to revocation of its market-based rate authority or
other remedies the Commission may deem appropriate, such as
disgorgement of profits or civil penalties. In addition, the Commission
creates a rebuttable presumption that all affiliates of a transmission
provider should lose their market-based rate authority in each market
in which their affiliated transmission provider loses its market-based
rate authority as a result of an OATT violation.
    22. With regard to other barriers to entry, the Commission adopts
the NOPR proposal to consider a seller's ability to erect other
barriers to entry as part of the vertical market power analysis, but
modifies the requirements when addressing other barriers to entry. The
Commission also provides clarification regarding the information that a
seller must provide with respect to other barriers to entry (including
which inputs to electric power production the Commission will consider
as other barriers to entry). The Commission adopts a rebuttable
presumption that ownership or control of, or affiliation with an entity
that owns or controls, intrastate natural gas transportation,
intrastate natural gas storage or distribution facilities; sites for
generation capacity development; and sources of coal supplies and the
transportation of coal supplies such as barges and rail cars do not
allow a seller to raise entry barriers, but intervenors are allowed to
demonstrate otherwise. The Final Rule also requires a seller to provide
a description of its ownership or control of, or affiliation with an
entity that owns or controls, intrastate natural gas transportation,
intrastate natural gas storage or distribution facilities; sites for
generation capacity development; and sources of coal supplies and the
transportation of coal supplies such as barges and rail cars. The
Commission will require sellers to provide this description and to make
an affirmative statement that they have not erected barriers to entry
into the relevant market and will not erect barriers to entry into the
relevant market. The Final Rule clarifies that the obligation in this
regard applies both to the seller and its affiliates, but is limited to
the geographic market(s) in which the seller is located.

Affiliate Abuse

    23. With regard to affiliate abuse, the Commission adopts the NOPR
proposal to discontinue considering affiliate abuse as a separate
``prong'' of the market-based rate analysis and instead to codify
affiliate restrictions in the Commission's regulations and address
affiliate abuse by requiring that the provisions provided in the
affiliate restrictions be satisfied on an ongoing basis as a condition
of obtaining and retaining market-based rate authority. As codified in
this Final Rule, the affiliate restrictions include a provision
prohibiting power sales between a franchised public utility with
captive customers and any market-regulated power sales affiliates\10\
without first receiving Commission authorization for the transaction
under section 205 of the FPA. The Commission also codifies as part of
the affiliate restrictions the requirements that previously have been
known as the market-based rate ``code of conduct'' (governing the
separation of functions, the sharing of market information, sales of
non-power goods or services, and power brokering), as clarified and
modified in this Final Rule. The Commission modifies certain of these
provisions, including separation of functions and information sharing,
consistent with certain requirements and exceptions contained in the
Commission's standards of conduct.\11\ In the Final Rule the Commission
defines ``captive customers'' as ``any wholesale or retail electric
energy customers served under cost-based regulation'' and provides
clarification that the definition of ``captive customers'' does not
include those customers who have retail choice, i.e., the ability to
select a retail supplier based on the rates, terms and conditions of
service offered. In addition, among other clarifications, the
Commission clarifies and modifies the definition of ``non-regulated
power sales affiliate,'' and changes the term to ``market-regulated
power sales affiliate.''
---------------------------------------------------------------------------

    \10\ In the NOPR, the Commission proposed to define the term
``non-regulated power sales affiliate.'' As discussed below, this
Final Rule uses the term ``market-regulated power sales affiliate''
instead.
    \11\ 18 CFR part 358.
---------------------------------------------------------------------------

    24. The Commission also provides clarification as to what types of
affiliate transactions are permissible and the criteria used to make
those decisions, and how the Commission will treat merging partners. In
addition, the Commission codifies in the regulations a prohibition on
the use of third-party entities, including energy/asset managers, to
circumvent the affiliate restrictions, but does not adopt the NOPR
proposal to treat energy/asset managers as affiliates. The Commission
also provides clarification regarding the Commission's market-based
rate policies as they relate to cooperatives.

Mitigation

    25. With regard to mitigation, in the Final Rule the Commission
retains the incremental cost plus 10 percent methodology as the default
mitigation for sales of one week or less; the default mitigation rate
for mid-term sales (sales of more than one week but less than one year)
priced at an embedded cost ``up to'' rate reflecting the costs of the
unit(s) expected to provide the service; and the existing policy for
sales of one year or more (long-term) sales.\12\ The

Commission will continue to allow sellers to propose alternative cost-
based methods of mitigation tailored to their particular circumstances.
The Final Rule also states that the Commission will make its stacking
methodology available for the public.\13\ In addition, the Commission
will continue the practice of allowing discounting and will permit
selective discounting by mitigated sellers provided that the sellers do
not use such discounting to unduly discriminate or give undue
preference.
---------------------------------------------------------------------------

    \12\ We note here that we expect mitigated sellers adopting the
default cost-based rates or proposing new cost-based rates will
propose a cost-based rate tariff of general applicability for sales
of less than one year, and sales of power for one year or longer
will be filed with the Commission on a stand-alone basis.
    \13\ This is addressed in the Mitigation section discussion
concerning the cost-based rate methodology for sales of more than
one week but less than one year.
---------------------------------------------------------------------------

    26. The Commission concludes that use of the Western Systems Power
Pool (WSPP) Agreement may be unjust, unreasonable or unduly
discriminatory or preferential for certain sellers. Therefore, in an
order being issued concurrently with this Final Rule, the Commission is
instituting a proceeding under section 206 of the FPA to investigate
whether, for sellers found to have market power or presumed to have
market power in a particular market, the WSPP Agreement rate for
coordination energy sales is just and reasonable in such market.
    27. The Commission does not impose an across-the-board ``must
offer'' requirement for mitigated sellers. While wholesale customer
commenters have raised concerns relating to their ability to access
needed power, the Commission concludes that there is insufficient
record evidence to support instituting a generic ``must offer''
requirement.
    28. The Commission limits mitigation to the market in which the
seller has been found to possess, or chosen not to rebut the
presumption of, market power and does not place limitations on a
mitigated seller's ability to sell at market-based rates in areas in
which the seller has not been found to have market power.
    29. Finally, regarding mitigation, the Final Rule allows mitigated
sellers to make market-based rate sales at the metered boundary between
a mitigated balancing authority area and a balancing authority area in
which the seller has market-based rate authority under the conditions
set forth herein, including a record retention requirement, and
provides a tariff provision to allow for such sales.

Implementation Process

    30. The Commission adopts the NOPR proposal to create a category of
sellers (Category 1 sellers) that are exempt from the requirement to
automatically submit updated market power analyses, with certain
clarifications and modifications. In addition, the Commission adopts
the NOPR proposal to implement a regional approach to updated market
power analyses, but reduces the number of regions from nine to six.
    31. As for a standardized tariff, the Commission does not adopt the
NOPR proposal to adopt a market-based rate tariff of general
applicability that all market-based rate sellers will be required to
file as a condition of market-based rate authority and to require each
corporate family to have only one tariff, with all affiliates with
market-based rate authority separately identified in the tariff.
Instead, the Commission adopts specific market-based rate tariff
provisions that the Commission will require to be part of a seller's
market-based rate tariff. However, the Commission will allow a seller
to include seller specific terms and conditions in its market-based
rate tariff, but the Commission will not review any of these
provisions, as they are presumed to be just and reasonable based on the
Commission's finding that the seller and its affiliates lack or have
adequately mitigated market power in the relevant market.

Miscellaneous Issues

    32. The Commission also provides clarifications in the Final Rule
with regard to accounting waivers, Part 34 blanket authorizations,
sellers affiliated with foreign entities, and the change in status
reporting requirement. Further, the Commission abandons the posting
requirements for third party sellers of ancillary services at market-
based rates as redundant of other reporting requirements.

IV. Discussion

A. Horizontal Market Power

1. Whether To Retain the Indicative Screens
    33. As discussed in detail below, the Commission is adopting in
this Final Rule two indicative horizontal market power screens, each of
which will serve as a cross-check on the other to determine whether
sellers may have market power and should be further examined. Although
some sellers disagree with the use of two screens or find flaws in
them, we conclude that this conservative approach will allow the
Commission to more readily identify potential market power. Sellers
that fail either screen will be rebuttably presumed to have market
power. However, such sellers will have full opportunity to present
evidence (through the submission of a DPT analysis) demonstrating that,
despite a screen failure, they do not have market power. No screen is
perfect, but we believe this approach appropriately balances the need
to protect against market power with the desire not to place
unnecessary filing burdens on utilities.
    34. The first screen is the wholesale market share screen, which
measures for each of the four seasons whether a seller has a dominant
position in the market based on the number of megawatts of uncommitted
capacity owned or controlled by the seller as compared to the
uncommitted capacity of the entire relevant market.\14\
---------------------------------------------------------------------------

    \14\ April 14 Order, 107 FERC ] 61,018 at P 100.
---------------------------------------------------------------------------

    35. The second screen is the pivotal supplier screen, which
evaluates the potential of a seller to exercise market power based on
uncommitted capacity at the time of the balancing authority area's
annual peak demand. This screen focuses on the seller's ability to
exercise market power unilaterally. It examines whether the market
demand can be met absent the seller during peak times. A seller is
pivotal if demand cannot be met without some contribution of supply by
the seller or its affiliates.\15\
---------------------------------------------------------------------------

    \15\ Id. at P 72.
---------------------------------------------------------------------------

    36. Use of the two screens together enables the Commission to
measure market power at both peak and off-peak times, and to examine
the seller's ability to exercise market power unilaterally and in
coordinated interaction with other sellers. Use of the two screens,
therefore, provides a more complete picture of a seller's ability to
exercise market power.\16\
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

    37. As discussed more fully in the following sections, with regard
to determining the total supply in the relevant market, the horizontal
market power analysis centers on and examines the balancing authority
area where the seller's generation is physically located. Total supply
is determined by adding the total amount of uncommitted capacity
located in the relevant market (including capacity owned by the seller
and competing suppliers) with that of uncommitted supplies that can be
imported (limited by simultaneous transmission import capability) into
the relevant market from the first-tier markets.
    38. Uncommitted capacity is determined by adding the total
nameplate or seasonal capacity \17\ of

generation owned or controlled through contract and firm purchases,
less operating reserves, native load commitments and long-term firm
sales.\18\ Uncommitted capacity from a seller's remote generation
(generation located in an adjoining balancing authority area) should be
included in the seller's total uncommitted capacity amounts. Any
simultaneous transmission import capability should first be allocated
to the seller's uncommitted remote generation. Any remaining
simultaneous transmission import capability would then be allocated to
any uncommitted competing supplies.
---------------------------------------------------------------------------

    \17\ As discussed more fully below, in this Final Rule, the
Commission gives sellers the option of using seasonal capacity
instead of nameplate capacity.
    \18\ Sellers may deduct generation associated with their long-
term firm requirements sales, unless the Commission disallows such
deductions based on extraordinary circumstances.
---------------------------------------------------------------------------

    39. Capacity reductions as a result of operating reserve
requirements should be no higher than State and Regional Reliability
Council operating requirements for reliability (i.e., operating
reserves). Any proposed amounts that are higher than such requirements
must be fully supported and will be considered on a case-by-case basis.
Moreover, if an intervenor provides conclusive evidence that a seller
did not in actual practice comply with the NERC or regional reliability
council operating reserve requirements, then we will take this into
account in determining the amount of the operating reserve deduction.
However, we emphasize that we expect each utility to meet its NERC and
regional reliability council reserve requirements, and that absent a
clear showing to the contrary by an intervenor, the required operating
reserve requirement is what we will use as the deduction in the market-
based rate calculation.\19\
---------------------------------------------------------------------------

    \19\ April 14 Order, 107 FERC ] 61,018 at P96.
---------------------------------------------------------------------------

    40. The Commission does not expect that sellers will have planned
generation outages scheduled for the annual peak load day. However, on
a case-by-case basis, the Commission will consider credible evidence
that planned generation outages for the peak load day of the year
should be included based on the particular circumstances of the
seller.\20\
---------------------------------------------------------------------------

    \20\ As noted below, the market share screen deducts generation
capacity used for planned outages (that were done in accordance with
good utility practice) in all four seasons in order to reflect the
typical operation of generation units.
---------------------------------------------------------------------------

    41. With regard to the pivotal supplier analysis, after computing
the total uncommitted supply available to serve the relevant market,
the next step in this analysis involves identifying the wholesale
market. The proxy for the wholesale load is the annual peak load
(needle peak) less the proxy for native load obligation (i.e., the
average of the daily native load peaks during the month in which the
annual peak load day occurs). Peak load is the largest electric power
requirement (based on net energy for load) during a specific period of
time, usually integrated over one clock hour and expressed in
megawatts, for the native load and firm wholesale requirements sales.
    42. To calculate the net uncommitted supply available to compete at
wholesale, the pivotal supplier analysis deducts the wholesale load
from the total uncommitted supply. If the seller's uncommitted capacity
is less than the net uncommitted supply, the seller satisfies the
pivotal supplier portion of the generation market power analysis and
passes the screen. If the seller's uncommitted capacity is equal to or
greater than the net uncommitted supply, then the seller fails the
pivotal supplier analysis which creates a rebuttable presumption of
market power.
    43. With regard to the wholesale market share analysis, which
measures for each of the four seasons whether a seller has a dominant
position in the market based on the number of megawatts of uncommitted
capacity owned or controlled by the seller as compared to the
uncommitted capacity of the entire relevant market, uncommitted
capacity amounts are used, as described above, with the following
variation. Planned outages (that were done in accordance with good
utility practice) for each season will be considered. Planned outage
amounts should be consistent with those as reported in FERC Form No.
714. To determine the amount of planned outages for a given season, the
total number of MW-days of outages is divided by the total number of
days in the season. For example, if 500 MW of generation that is out
for six days during the winter period the calculation of planned
outages would be: (500 MW x 6)/91 or 33 MW.
    44. The market share analysis adopts an initial threshold of 20
percent. That is, a seller who has less than a 20 percent market share
in the relevant market for all seasons will be considered to satisfy
the market share analysis.\21\ A seller with a market share of 20
percent or more in the relevant market for any season will have a
rebuttable presumption of market power but can present historical
evidence to show that the seller satisfies our generation market power
concerns.
---------------------------------------------------------------------------

    \21\ The 20 percent threshold is consistent with Sec.  4.134 of
the U.S. Department of Justice 1984 Merger Guidelines issued June
14, 1984, reprinted in Trade Reg. Rep. P13,103 (CCH 1988): ``The
Department [of Justice] is likely to challenge any merger satisfying
the other conditions in which the acquired firm has a market share
of 20 percent or more.''
---------------------------------------------------------------------------

Commission Proposal
    45. In the NOPR, the Commission proposed to retain the indicative
screens (pivotal supplier and market share) to assess horizontal market
power that were initially adopted in April 2004.\22\ Because the
indicative screens are intended only to identify the sellers that
require further review, the Commission proposed to retain the 20
percent threshold for the wholesale market share indicative screen,
stating that the 20 percent market share threshold strikes the right
balance in seeking to avoid both ``false negatives'' and ``false
positives.'' The Commission also proposed to continue to measure
pivotal suppliers at the time of the annual peak load in the pivotal
supplier indicative screen, which is the most likely point in time that
a seller will be a pivotal supplier. For this reason, the Commission
did not propose to expand the pivotal supplier analysis to other time
periods.
---------------------------------------------------------------------------

    \22\ See April 14 Order, 107 FERC  61,018.
---------------------------------------------------------------------------

Comments
    46. Numerous commenters question whether the Commission should
retain the current indicative screens in whole or in part. For example,
Southern, Duke and EEI advocate abandoning the market share indicative
screen altogether. They argue that the market share indicative screen
is ``fatally flawed'' because it does not take into account wholesale
demand in the relevant market \23\ which makes it difficult for
traditional utilities outside of RTOs/ISOs to pass.\24\ E.ON. US. and
PNM/Tucson separately argue that one must consider the level of demand
that is seeking supply and, more particularly, what ability sellers
have to exercise market power over those buyers.\25\ In this regard,
E.ON. US. and

PNM/Tucson argue that to the extent the market share screen does not
consider wholesale demand, it is not a useful indicator, and in fact is
almost universally a false indicator of the ability of a seller to
exercise market power over demand. Also, EEI argues that because of
design flaws inherent in the market share screen as well as the
negative impact that the use of this test has had since 2004 on the
development of competitive wholesale markets (through the inappropriate
exclusion of the majority of non-RTO utilities from participating in
that market), the market share screen should be eliminated for all
market power screening and analysis purposes.\26\
---------------------------------------------------------------------------

    \23\ Southern at 11, Duke at 20, EEI at 6-7.
    \24\ Duke at 17, EEI at 8-9.
    \25\ E.ON. US. at 16-17 and PNM/Tucson at 5-6. According to
E.ON. US. and PNM/Tucson, the past decade has seen strong
development in the West of open access to transmission and the
ownership of generating assets, solely or jointly, by formerly
``captive'' wholesale customers. As a result, any analysis that has
as its foundation division of the market into suppliers and
presumptively captive customers is at odds with present reality, in
which wholesale customers have a host of suppliers seeking their
business. E.ON. US. and PNM/Tucson state that an illustration of how
open access in the West has enhanced the ability of load serving
entities to secure competitive resources on an efficient scale
across control areas is provided by a recent Southwest Public Power
Resources Group request for proposals for 255 MW in 2007, growing to
962 MW by 2014 in four control areas--Arizona Public Service, Salt
River Project, Western Area Power Administration-Desert Southwest
Region and Tucson Electric. (The Southwest Public Power Resources
Group represents thirty-nine public power entities in Arizona,
California, and Nevada.) See Southwestern Public Utilities Issue
Long-Term RFP, ELECTRIC POWER DAILY, July 14, 2006, at 3.
    \26\ EEI at 10.
---------------------------------------------------------------------------

    47. EEI contends that the Commission should use only the pivotal
supplier screen for indicative screening purposes and the DPT pivotal
supplier and market concentration analyses for the purposes of
rebutting the presumption of generation market power that would result
from the failure of the indicative pivotal supplier screen. EEI argues
that if the Commission continues to use the market share screen as an
initial screen, the Commission should not include a market share test
as a component of any subsequent DPT analysis of market power.
    48. E.ON U.S. and PNM/Tucson generally agree, stating that market
share is an unreliable measure of market power in competitive energy
markets and that the courts have long recognized that market share is
not a reliable indicator of market power in regulated markets.\27\ In
particular, E.ON U.S. and PNM/Tucson argue that even a marginal failure
of the market share screen results in a rebuttable presumption of
market power that has tremendous consequences by forcing sellers to
proceed to costly and time-consuming DPT analysis or agree to
mitigation. As a result, the ``false positives'' arising from the
market share screen dampen the vigor of competitive wholesale market
participation by unnecessarily curtailing the market-based authority of
entities that, in fact, lack market power (to the extent such entities
choose not to pursue a costly and uncertain effort to rebut the
presumption of market power created by the screen failure).\28\
---------------------------------------------------------------------------

    \27\ Citing Cost Mgmt. Servs., Inc. v. Wash. Natural Gas Co., 99
F.3d 937, 950-51 (9th Cir. 1996) (Cost Management); Rebel Oil Co.,
Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1439 (9th Cir. 1995)
(Rebel); S. Pac. Communications Co. v. AT&T Co., 740 F.2d 980, 1000
(D.C. Cir. 1984) (Southern Pacific Communications); MCI
Communications Corp. v. AT&T Co., 708 F.2d 1081, 1107 (7th Cir.
1983) (MCI Communications); Mid-Tex. Communications Sys., Inc. v.
AT&T Co., 615 F.2d 1372, 1386-89 (5th Cir. 1980) (Mid-Tex
Communications); Almeda Mall, Inc. v. Houston Lighting & Power Co.,
615 F.2d 343, 354 (5th Cir. 1980) (Almeda).
    \28\ E.ON U.S. at 16; PNM/Tucson at 5-6.
---------------------------------------------------------------------------

    49. Duke and Southern suggest that a wholesale contestable load
analysis (also described as a ``competitive alternatives'' analysis)
\29\ should be added to the indicative screens, which would consider
the amount of excess market supply available to serve the amount of
wholesale demand seeking supply.\30\ Generally, if available non-
applicant supply is at least twice the contestable load, advocates of
the contestable load analysis believe that is sufficient to make a
finding that the market is competitive.\31\ Other commenters agree that
the market share indicative screen can diminish competition because
sellers that are subjects of an FPA section 206 investigation tend to
choose mitigation rather than challenge the presumption of market
power.\32\
---------------------------------------------------------------------------

    \29\ Dr. Pace at 12.
    \30\ Duke at 21, Southern at 16-17.
    \31\ Dr. Pace at 16.
    \32\ E.ON U.S. at 15-16; PNM/Tucson at 5-6, EEI at 10.
---------------------------------------------------------------------------

    50. Duke argues that the Commission has yet to establish a need for
using the market share indicative screen in addition to the pivotal
supplier indicative screen in assessing the potential for the exercise
of generation market power. In this regard, Duke argues that the
Commission itself acknowledged in the April 14 Order (establishing the
new indicative market power screens) that if a supplier passes the
pivotal supplier indicative screen, it would not be able to exercise
generation market power. Thus, Duke concludes that the use of any other
indicative screens would appear to be redundant and an unwarranted
burden on market-based rate sellers.\33\ Further, Duke submits that
neither of the rationales originally cited by the Commission in support
of the market share screen--its ability to identify ``coordinating
behavior,'' or its ability to detect the exercise of market power in
off-peak periods--has been validated. In this regard, Duke submits that
the potential for ``coordinating behavior'' should consider overall
market concentration levels as measured by HHIs and in any event, such
behavior is already subject to oversight and substantial penalties
under the antitrust laws and the Commission's recently adopted rule
prohibiting market manipulation. Further, Duke claims that the nearly
universal failure rate of load-serving utilities under the market share
indicative screen in their control areas underscores its limited value
as an indicator of off-peak market power.\34\
---------------------------------------------------------------------------

    \33\ Duke reply comments at 15 and n. 21.
    \34\ Duke reply comments at 15 and n. 22.
---------------------------------------------------------------------------

    51. Duke states that a review of filings by vertically integrated
utilities that are not RTO participants shows that the vast majority
have failed the market share screen in their control areas, and most
have subsequently been forced to adopt some form of cost-based
mitigation for wholesale sales in that market. Yet Duke is unaware of
any credible evidence suggesting that any form of generation market
power has been exercised by these utilities. Instead, Duke states that
the Commission has revoked market-based rate authority and imposed
mitigation on the basis of indicative screen results that suggest the
potential for market power.\35\ APPA/TAPS counter that the Commission
should not limit its response to market power only to instances of its
actual exercise; they note that the Commission considers whether a
seller and its affiliates have market power or have mitigated it, not
whether it has been exercised.\36\
---------------------------------------------------------------------------

    \35\ Duke at 16.
    \36\ APPA/TAPS reply comments at 6-7, citing Duke at 16.
---------------------------------------------------------------------------

    52. Another commenter suggests substituting the HHI for the market
share indicative screen or supplementing the indicative screens with
the HHI, reasoning that the market must be evaluated, not just the
individual market share.\37\
---------------------------------------------------------------------------

    \37\ Drs. Broehm & Fox-Penner at 2-4.
---------------------------------------------------------------------------

    53. Southern states that the Commission should rely upon any
indicative screens only in conjunction with an optional ``expedited
track'' safe harbor review. Under Southern's proposal, the indicative
screens would be voluntary and those submitting to and passing the
screens would be permitted to retain or obtain market-based rate
authority, subject to a proceeding under section 206 of the FPA, under
which the party seeking to challenge the rate must submit substantial
evidence justifying revocation. If a seller fails the screen(s), or if
it elects to submit a DPT rather than voluntarily submit the indicative
screens, then a robust market power assessment should be used to
determine whether (or the extent to which) the

seller should be permitted to sell power at market-based rates.
    54. In Southern's view, failure of the indicative screens should
not give rise to a presumption of market power.\38\ Southern argues
that mere failure to pass a screen, without more robust market power
assessments, is an insufficient basis upon which to base a presumption
of market power. Southern argues this is because, in the case of the
pivotal supplier screen, the Commission itself admits that it does not
give a full picture and that the DPT provides better information. With
regard to the market share screen, Southern argues that the market
share screen has even more basic problems as an indicator of market
power. Southern states that, because of the market share analysis'
serious flaws, the great majority of integrated franchised public
utilities inevitably will fail the market share screen. Thus, with
respect to integrated franchised public utilities, the market share
screen serves no real purpose other than to state the obvious:
Integrated franchised public utilities build and maintain adequate
resources to serve their native loads and inevitably will have market
shares greater than 20 percent in their home control areas under the
Commission's computational procedures. Southern states that, since the
DPT reduces the level of false positives and is a more definitive means
for determining the existence of market power, the Commission should
use the DPT as the default test.\39\ PPL agrees with Southern's
proposal that the indicative screens be made voluntary.\40\
---------------------------------------------------------------------------

    \38\ Southern argues that, in the context of the indicative
screens, the prejudice associated with integrated franchised public
utility status is severe and instead of providing a fair or
meaningful measure of market power, the market share screen operates
to create a priori evidentiary presumption of guilt, the screen is
improper, creates due process concerns, and should not be adopted
for purposes of the final rule.
    \39\ Southern at 8, 11-13.
    \40\ PPL reply comments at 8.
---------------------------------------------------------------------------

    55. Southern states that if the market share screen is retained, it
should be adjusted for forced outages because such capacity is not
available. Southern also notes that forced outages are tracked and
reported to the North American Electric Reliability Corporation (NERC),
which presents generating unit availability statistics data for
generator unit groups.\41\
---------------------------------------------------------------------------

    \41\ Southern at 14-15.
---------------------------------------------------------------------------

    56. NRECA disagrees with Southern's proposal, stating that forced
outage deductions have little effect when applied to all sellers.\42\
It also believes that sellers do not make forced outage deductions in
long-term contracts; therefore, it is inappropriate to make the
deduction for the market power tests.
---------------------------------------------------------------------------

    \42\ NRECA reply comments at 18.
---------------------------------------------------------------------------

    57. While EPSA does not agree with some of the Commission's
proposed changes to the horizontal analysis in the NOPR (i.e., changes
to the post-1996 exemption and the native load proxy), in general, EPSA
supports the two indicative screens as a means for indicating that an
entity might have market power.
    58. EPSA notes that it is time to move beyond the battle over
crafting the perfect screens, arguing: (1) It is likely no such perfect
screens exist, as evidenced by the fact that stakeholders and the
Commission have gone through several iterations to get to today's
screens; and (2) in the end, the screens are only indicative measures.
EPSA notes that failure of one or both of the screens does not brandish
an entity with market power, but merely raises a flag that further
analysis is necessary in order to assess an entity's ability to
exercise market power. The current state of wholesale electricity
markets, EPSA argues, requires indicative screens that are neither
definitive nor an aperture letting everything pass, but rather a sieve
that catches potential problems for further examination. EPSA agrees
with retention of both of the current indicative screens and the ``next
steps'' set forth for those entities that fail one or both of those
screens.
    59. Several other commenters also support retention of the
indicative screens. Some of these commenters state that, because
section 205 of the FPA requires rates to be just and reasonable, a
market share indicative screen is appropriate to ensure that outcome.
NRECA adds that ``[b]ecause of past or present State regulation, many
traditional public utilities have acquired dominant market shares of
generation capacity in their own control areas--sufficient to enable
them to exercise market power absent regulation of their behavior.
NRECA submits that regardless of the cause the incumbent public
utilities will remain the dominant firms in their own control areas
absent significant new market entry in the form of new generation
construction in the control area by independent firms, or significant
transmission construction to permit entry by generation outside the
control area. Morgan Stanley also favors retaining the market share
indicative screen, noting that failure of the market share indicative
screen does not mean the process is unfair, and asserting that
exclusive reliance on the pivotal supplier indicative screen may
compromise market power detection.\43\
---------------------------------------------------------------------------

    \43\ Morgan Stanley reply comments at 10-11.
---------------------------------------------------------------------------

    60. With regard to the suggestion that the Commission adopt a
contestable load analysis, several commenters criticize the contestable
load analysis, stating that it changes the focus of the market power
analysis from the seller to the market. They counter that the
contestable load analysis is unsound, with APPA/TAPS citing Federal
Trade Commission (FTC) comments in this proceeding that such an
analysis is flawed.\44\ NRECA states that commenters have not provided
sufficient justification for using a contestable load analysis.
---------------------------------------------------------------------------

    \44\ APPA/TAPS reply comments at 11, NRECA reply comments at 13-
14. The FTC filed comments in this proceeding in January 2006 on the
contestable load test. FTC states that ``the historical contestable
load proposal fails to include a number of potentially important
considerations in its framework for assessing horizontal market
power, and the elements that it does include are not considered in
an economically sound manner. In sum, the proposal does not
represent an analytical advance over existing techniques to evaluate
horizontal market power, and it falls far short of the economically
sound framework for market power analysis presented in the Merger
Guidelines.'' The FTC defines the following specific problems with
the contestable load analysis: the price is not considered in the
assessment of available supply, contractual and legal restrictions
on supply are ignored, and the contestable load analysis ignores
transmission discrimination and transmission constraints, which
delineate the market.
---------------------------------------------------------------------------

    61. With regard to Southern's suggestion that the indicative
screens be made voluntary and function as a safe harbor, such that
screen failure would simply mean that further review of the seller
would be appropriate, but not merit a section 206 investigation, NRECA
states that Southern's argument is contrary to law. NRECA argues that,
as the proponent of a tariff allowing it to charge market-based rates,
the public utility has the burden of proof to demonstrate that its
wholesale rates will be disciplined by competition. NRECA submits that
failing the indicative screens indicates that the seller has not yet
provided `` `empirical proof' '' that competition will drive down
prices to just and reasonable levels as the FPA requires.\45\
---------------------------------------------------------------------------

    \45\ NRECA reply comments at 20-21.
---------------------------------------------------------------------------

Commission Determination
    62. We adopt the proposal in the NOPR to retain both of the
indicative screens. The intent of the indicative screens is to identify
the sellers that raise no horizontal market power concerns and can
otherwise be considered for market-based rate authority. At the same
time, sellers that do not pass the indicative screens are allowed to
provide additional analysis

for Commission consideration. Because the indicative screens are
intended to screen out only those sellers that raise no horizontal
market power concerns, as opposed to other sellers that raise concerns
but may not necessarily possess horizontal market power, we find it
appropriate to use conservative criteria and to rely on more than one
screen. A conservative approach at the indicative screen stage of the
proceeding is warranted because, if a seller passes both of the
indicative screens, there is a rebuttable presumption that it does not
possess horizontal market power.
    63. The rebuttable presumption of horizontal market power that
attaches to sellers failing one of the indicative screens is just
that--a rebuttable presumption. It is not a definitive finding by the
Commission; sellers are provided with several procedural options
including the right to challenge the market power presumption by
submitting a DPT analysis, or, alternatively, sellers can accept the
presumption of market power and adopt some form of cost-based
mitigation.\46\ Accordingly, we will adopt the proposal to continue to
use the two indicative screens and find that failure of either
indicative screen creates a rebuttable presumption of market power. We
reiterate our finding that ``[f]ailure to pass either of the indicative
screens * * * will constitute a prima facie showing that the rates
charged by the seller pursuant to its market-based rate authority may
have become unjust and unreasonable and that continuation of the
seller's market-based rate authority may no longer be just and
reasonable.'' \47\
---------------------------------------------------------------------------

    \46\ In the April 14 Order, the Commission stated that proposals
for alternative mitigation in these circumstances could include
cost-based rates or other mitigation that the Commission may deem
appropriate. For example, a seller could propose to transfer
operational control of enough generation to a third party such that
the applicant would satisfy our generation market power concerns.
April 14 Order, 107 FERC ] 61,018 at n. 142.
    \47\ April 14 Order, 107 FERC ] 61,018 at P 209.
---------------------------------------------------------------------------

    64. This approach, contrary to the claims of several commenters,
will help to further competitive markets by allowing sellers without
market power to sell power at market-based rates, and it will similarly
give customers security that sellers that fail the screens are required
to submit to further scrutiny and/or mitigation.
    65. The pivotal supplier and market share indicative screens
measure different aspects of market power. As the Commission stated in
the April 14 Order, the uncommitted pivotal supplier indicative screen
measures the ability of a firm to dominate the market at peak periods.
The uncommitted market share analysis provides a measure as to whether
a supplier may have a dominant position in the market, which is another
indicator of potential unilateral market power and the ability of a
seller to effect coordinated interaction with other sellers. The market
share screen is also useful in measuring market power because it
measures a seller's size relative to others in the market, in
particular, the seller's share of generating capacity uncommitted after
accounting for its obligations to serve native load. The market share
screen provides a snapshot of these market shares in each season of the
year. Taken together, the indicative screens can measure a seller's
market power at both peak and off-peak times.\48\ Both market share and
pivotal supplier indicative screens are appropriate first steps for the
Commission to use in determining if it needs a more robust analysis to
determine whether the seller has market power. We conclude that having
two screens as backstops to one another will better assist us in
determining the existence of potential market power. Accordingly, we
reject the suggestion of several commenters to abandon the market share
indicative screen. We will retain both the pivotal supplier and market
share indicative screens as described in the NOPR, as well as apply the
rebuttable presumption of market power for those sellers that fail
either indicative screen.\49\
---------------------------------------------------------------------------

    \48\ April 14 Order, 107 FERC ] 61,018 at P 72.
    \49\ As we noted in the July 8 Order, a number of those
commenters that proposed eliminating the market share screen had
supported it as a viable alternative in the past. July 8 Order, 108
FERC ] 61,026 at P 87.
---------------------------------------------------------------------------

    66. In addition, the Commission will not adopt suggestions to alter
the indicative screens in order to incorporate a contestable load
analysis, as proposed by EEI and others. As noted by the FTC, APPA/
TAPS, and NRECA, the contestable load analysis is flawed because, among
other things, it does not consider control of generation through
contracts. The Commission explained in the April 14 Order that the
roles of the indicative screens are meant to be complementary. The
pivotal supplier indicative screen indicates whether demand can be met
without some contribution of supply by the seller at peak times, while
the market share indicative screen indicates whether the seller has a
dominant position in the market and may therefore have the ability to
exercise horizontal market power, both unilaterally and in coordination
with other sellers.\50\ The contestable load analysis is essentially a
variant on the pivotal supplier screen with differences in the
calculation of wholesale load and the test thresholds, because, like
the pivotal supplier screen, it addresses whether suppliers other than
the seller can meet the demand in the relevant market. Therefore
incorporating such an analysis would not improve our ability to
establish a presumption of whether a seller has market power. The
contestable load analysis therefore would add little useful
information, and without the market share indicative screen, the
Commission would have insufficient information because there would be
no analysis of a seller's size relative to the other sellers in the
market, and no information on the seller's market power during off-peak
periods.
---------------------------------------------------------------------------

    \50\ April 14 Order, 107 FERC ] 61,018 at P 72.
---------------------------------------------------------------------------

    67. In addition, the contestable load analysis fails to consider
the relative price of the competing supplies. Commenters have argued
that if available non-applicant supply is at least twice the
contestable load, the market is competitive. However, this analysis
fails to consider whether the available non-applicant supply is
competitively priced and, thus, in the market. This weakness in the
contestable load analysis is addressed in the DPT analysis which
considers only supply that is competitively priced.
    68. We also reject arguments by E.ON U.S. and PNM/Tucson that the
wholesale market share screen should be replaced because, they argue,
it does not consider the size of the wholesale supply in the relevant
market relative to the wholesale demand in that market. E.ON. U.S. and
PNM/Tucson are requesting an analysis very similar to the contestable
load analysis, whose defining characteristic is measuring the wholesale
supply market relative to wholesale demand, which, as stated above, is
essentially the same as the pivotal supplier screen, and would
therefore add little useful information to the screening process.
    69. We reject Duke's claim that because neither of the rationales
originally cited by the Commission in support of the market share
indicative screen--its ability to identify ``coordinating behavior,''
or its ability to detect the exercise of market power in off-peak
periods--has been validated, the wholesale market share indicative
screen is unnecessary. Specifically, the Commission believes that the
ability of market participants to exercise market power through
``coordinating behavior'' is a legitimate concern under the FPA, in
addition to the fact that it has long been recognized by the antitrust

authorities.\51\ The Commission also believes it is possible to
exercise market power in off-peak periods because during such times the
amount of supply in the market may be greatly reduced (e.g., because of
planned outages for plant maintenance), meaning that a seller that is
not dominant at peak times might be at off-peak.
---------------------------------------------------------------------------

    \51\ See 1992 FTC/DOJ 1992 Horizontal Merger Guidelines sec.
2.1.
---------------------------------------------------------------------------

    70. Moreover, we agree with APPA/TAPS that market-based rate
assessments are used to determine the ability to exercise, not the
exercise of, market power. The Commission need not wait passively until
market power is exercised. Rather, it is incumbent on the Commission to
set policies that will ensure that rates remain just and reasonable
under section 205 of the FPA. Requiring sellers to submit screens that
analyze the sellers' potential to exercise market power is consistent
with such a policy.
    71. We are unpersuaded by E.ON U.S.'s and PNM/Tucson's argument
that ``false positives'' arising from the market share screen dampen
the vigor of competitive wholesale market participation by
unnecessarily curtailing the market-based rate authority of entities
that, according to E. ON. U.S. and PNM/Tucson, lack market power. We
recognize that a conservative screen may result in some false
positives, but must weigh that against the cost of the false negatives
that would occur if we adopted a less conservative screen or eliminated
the market share indicative screen.
    72. E.ON U.S. and PNM/Tucson, to support their point, cite several
court cases in which market shares were alleged not to be reliable
indicators of market power in regulated markets. However, the cases
cited are not relevant to the issue of whether the Commission should
retain the wholesale market share screen. The purpose of our indicative
screens is to distinguish sellers that may raise horizontal market
power concerns and those that do not; the market share screen is not
the end of our horizontal market power analysis. In contrast, the cases
cited by E.ON U.S. and PNM/Tucson \52\ involve allegations of unlawful
restraint of trade in violation of the Sherman Act,\53\ a Federal
antitrust statute prohibiting trade monopolies. The focus in such cases
(whether a company has violated the Sherman Act) and the standard for
making such a determination is different than the focus of the
Commission at the indicative screen stage of the horizontal market
power analysis (identifying sellers that require further horizontal
market analysis without making a definitive finding regarding market
power).
---------------------------------------------------------------------------

    \52\ Cost Management, 99 F.3d 937; Rebel Oil, 51 F.3d 1421; S.
Pac. Communications, 740 F.2d 780; MCI Communications, 708 F.2d
1081; Mid-Tex Communications, 615 F.2d 1372; and Almeda, 615 F.2d
343.
    \53\ 15 U.S.C. 2, which states: ``Every person who shall
monopolize, or attempt to monopolize, or combine or conspire with
any other person or persons, to monopolize any part of the trade or
commerce among the several States, or with foreign nations, shall be
deemed guilty of a felony, and, on conviction thereof, shall be
punished by fine not exceeding $100,000,000 if a corporation, or, if
any other person, $1,000,000, or by imprisonment not exceeding 10
years, or by both said punishments, in the discretion of the
court.''
---------------------------------------------------------------------------

    73. On both theoretical and practical grounds, we reject the
argument by EEI and others that the market share indicative screen can
diminish competition because some sellers that are the subject of a
section 206 investigation choose mitigation rather than challenge the
presumption of market power. First, mitigating a seller with market
power ensures that the other sellers in the market cannot benefit from
an artificially high market price due to the seller with market power
exercising market power. Second, in our experience, sellers that choose
mitigation rather than challenge the presumption of market power have
market shares that are likely to indicate a dominant position in a
geographic market.\54\ In addition, many sellers have successfully
rebutted the presumption of market power after failing one of the
indicative screens.\55\
---------------------------------------------------------------------------

    \54\ See, e.g., Aquila, Inc., 112 FERC ] 61,307 (2005); Carolina
Power & Light Co., 113 FERC ] 61,130 (2005); The Empire District
Electric Co., 116 FERC ] 61,150 (2006); MidAmerican Energy Co., 117
FERC ] 61,178 (2006); Xcel Energy Services Inc., 117 FERC ] 61,180
(2006).
    \55\ See, e.g., Kansas City Power and Light Co., 113 FERC ]
61,074 (2005); PPL Montana, LLC, 115 FERC ] 61,204 (2006);
PacifiCorp, 115 FERC ] 61,349 (2006); Tucson Electric Power Co., 116
FERC ] 61,051 (2006); Acadia Power Partners, LLC, 113 FERC ] 61,073
(2005).
---------------------------------------------------------------------------

    74. Further, we will not adopt the suggestion to substitute the HHI
for the market share indicative screen or to supplement the indicative
screens with the HHI. The indicative screens are used to separate
sellers who are presumed to have market power from those that, absent
extraordinary and transitory circumstances, clearly do not. We will not
substitute the market share screen with an HHI screen because, as we
have stated above, the seller's market share conveys useful information
about its ability to exercise market power, so eliminating the market
share screen in favor of the HHI could increase the risk of false
negatives.\56\ In addition, a high HHI can be the result of high market
shares of sellers in the market other than the seller, and the focus of
our analysis is on the seller's ability to exercise market power, so
the HHI would provide little additional information to allow us to
identify those sellers who clearly do not have market power. Finally,
the HHI primarily provides information on the ability of sellers to
exercise market power through coordinated behavior, while the market
share screen primarily provides information on a particular seller's
ability unilaterally to exercise market power. We will not supplement
the indicative screens with the HHI screen because the indicative
screens are sufficiently conservative to identify those sellers that
have a rebuttable presumption of market power, without having to add an
additional layer of review at the initial stage.
---------------------------------------------------------------------------

    \56\ For example, in a market with one seller with a 35 percent
market share and 13 sellers each with 5 percent market shares, the
HHI would be 1,550 (1,225 + 13(25)), which would not fail the 2,500
HHI threshold or even the proposed lower 1,800 HHI threshold. In
such a market, a firm with a 35 percent market share could have the
ability to exercise market power, which would not be picked up by an
HHI screen.
---------------------------------------------------------------------------

    75. We clarify that sellers and intervenors may present alternative
evidence such as a DPT study or historical sales and transmission data
to support or rebut the results of the indicative screens. For example,
intervenors could present evidence based on historical wholesale sales
data or challenge the assumption that competing suppliers inside a
balancing authority area have access to the market (such a challenge
could take into account both the actual historical transmission usage
at the time of the study as well as the amount of available
transmission capacity at that time).\57\ A seller may present evidence
in support of a contention that, notwithstanding the results of the
indicative screens, it does not possess market power.\58\ However,
sellers should not expect that the Commission will postpone initiating
a section 206 investigation to protect customers while it examines this
supplemental information if screen failures are indicated.\59\
Nevertheless, the Commission may factor in this alternative evidence
before deciding whether to initiate a section 206 investigation if the
alternative evidence is appropriately supported, comprehensive and
unambiguous, and

conducive to prompt review by the Commission.
---------------------------------------------------------------------------

    \57\ Id. at P 37.
    \58\ Id. at n. 11.
    \59\ See, e.g., LG&E Energy Mtkg. Inc., 111 FERC ] 61,153 at P
21, 22 (2005); Tampa Electric Co., 110 FERC ] 61,206 at P 24, 25
(2005); Entergy Services, Inc., 109 FERC ] 61,282 at P 36 (2004).
---------------------------------------------------------------------------

    76. We will not adopt Southern's suggestion that the indicative
screens be made voluntary. We will continue to require that sellers
submit the indicative screens or concede the presumption of market
power before they file a DPT. However, as discussed above, a seller may
submit with its indicative screens a DPT as alternative evidence. As
stated above, submission of a DPT analysis as alternative evidence at
the same time a seller submits the indicative screens may result in the
Commission instituting a section 206 proceeding to protect customers,
based on failure of an indicative screen, while the Commission
considers the merits of the DPT analysis.
    77. We do not agree with Southern's view that failure of the
indicative screen(s) does not provide a sufficient basis to establish a
rebuttable presumption of market power. The indicative screens are
intended to identify the sellers that raise no horizontal market power
concerns and can otherwise be considered for market-based rate
authority. Sellers failing one or both of the indicative screens, on
the other hand, are identified as sellers that potentially possess
horizontal market power and for which a more robust analysis is
required. The uncommitted pivotal supplier screen focuses on the
ability to exercise market power unilaterally. Failure of this screen
indicates that some or all of the seller's generation must run to meet
peak load. The uncommitted market share analysis indicates whether a
supplier has a dominant position in the market. Failure of the
uncommitted market share screen may indicate the seller has unilateral
market power and may also indicate the presence of the ability to
facilitate coordinated interaction with other sellers. It is on this
basis that we find that a rebuttable presumption of market power is
warranted when a seller fails one or both of the indicative screens.
However, we agree with Southern that the DPT is a more definitive means
for determining the existence of market power. As a result, we allow
sellers that have failed one or both of the indicative screens to rebut
the presumption of market power by performing the DPT. Further, because
failure of one or both of the indicative screens only creates a
rebuttable presumption of market power and sellers have a Commission-
endorsed analysis that they can use to rebut that presumption (the
DPT), we find without merit Southern's view that the indicative screens
create a priori evidentiary presumption of guilt, are improper, and
create due process concerns.
    78. With regard to Southern's suggestion that we use the DPT as the
default test, we find that if we were to do so our ability to protect
customers while the analysis is evaluated could be compromised. The DPT
is a more involved and complex analysis. The Commission has also at
times set a DPT analysis for evidentiary hearing which greatly extends
the time between when the DPT is submitted to the Commission and when a
final decision is rendered. The rates customers are subject to during
the time period before the issuance of a Commission order addressing a
seller's DPT would not be subject to refund and, accordingly, the
customers would be unprotected if the seller ultimately is found to
have market power. However, under our current policy, and as adopted
herein, if a seller wishes to file a DPT rather than the indicative
screens it may do so. In doing so, the seller concedes that it fails
the indicative screens, which concession establishes a rebuttable
presumption of market power, and the Commission will issue an order
initiating a section 206 proceeding to investigate whether the seller
has market power and establishing a refund effective date for the
protection of customers while the Commission evaluates the filed DPT.
In the case of a seller that concedes the failure of one or both of the
screens and submits the DPT in the same filing, the Commission is able
to establish a refund effective date at an earlier time than if the
seller were able to skip the screen stage entirely and file a DPT
without conceding a screen failure.
    79. We will reject Southern's request that forced outages be
deducted from capacity. As we stated in the July 8 Order, ``forced
outages are non-recurring events that do not reflect normal operating
conditions.'' \60\ Allowing deduction of forced outages will generally
not change indicative screen results, because all sellers will be able
to deduct forced outages, offsetting each other. In the unlikely event
that forced outage numbers were not completely offsetting, allowing
forced outages in the indicative screens would benefit owners of
relatively unreliable fleets at the expense of owners of relatively
reliable fleets.
---------------------------------------------------------------------------

    \60\ July 8 Order, 108 FERC ] 61,026 at P 68.
---------------------------------------------------------------------------

2. Indicative Market Share Screen Threshold Levels and Pivotal Supplier
Application Period
Commission Proposal
    80. In the NOPR, the Commission proposed to retain the 20 percent
threshold for the wholesale market share screen (i.e., with a market
share of less than 20 percent, the seller would pass the screen). The
Commission stated that since the screens are indicative, not
definitive, a relatively conservative threshold for passing them was
appropriate. Indeed, pursuant to the horizontal market power analysis,
the Commission will not make a definitive finding that a seller has
market power unless and until the more robust analysis, the DPT, is
considered.
    81. The Commission proposed to continue the use of annual peak load
in the pivotal supplier analysis and not to expand the pivotal supplier
analysis to include monthly assessments. It stated that the pivotal
supplier analysis examines the seller's market power during the annual
peak, and that the hours near that point in time are the most likely
times that a seller will be a pivotal supplier.
a. Market Share Threshold
Comments
    82. A number of commenters argue that 20 percent is too low a
threshold for the market share indicative screen. Some point out that,
given native load requirements, it is very difficult for investor-owned
utilities outside of RTOs/ISOs to fall below the 20 percent threshold
for the market share indicative screen.\61\ Duke also notes that the 20
percent criterion is incompatible with regional planning requirements
because, according to Duke, the amount of capacity needed to satisfy
regional planning reserve margins ``would place the utility at
substantial risk of exceeding the 20 percent threshold.'' \62\
---------------------------------------------------------------------------

    \61\ See, e.g., Southern at 8-9, Duke at 15-16, EEI at 8-9.
    \62\ Duke at 17.
---------------------------------------------------------------------------

    83. E.ON U.S. argues that, because the courts have not considered a
20 percent market share to indicate a market power concern, associating
a market share indicative screen failure with a presumption of market
power is inappropriate.\63\ Additionally, Progress

Energy argues that it is inappropriate to associate failure of the
market share screen with a presumption of market power when U.S.
Department of Justice (DOJ) merger guidelines state that only firms
with 35 percent or more market share have market power.\64\
---------------------------------------------------------------------------

    \63\ See E.ON U.S. at 14-15, n.18, citing PepsiCo, Inc. v. Coca-
Cola Co., 315 F.3d 101, 109 (2d Cir. 2003) (``Absent additional
evidence, such as an ability to control prices or exclude
competition, a 64 percent market share is insufficient to infer
monopoly power.''); AD/SAT v. Associated Press, 181 F.3d 216, 229
(2d Cir. 1999) (concluding that 33 percent market share is
insufficient to show a dangerous probability of monopoly power);
United Air Lines, Inc. v. Austin Travel Corp., 867 F.2d 737, 742 (2d
Cir. 1989) (finding that 31 percent market share does not constitute
a national monopoly).
    \64\ Progress Energy at 7, citing EEI at 6-10.
---------------------------------------------------------------------------

    84. PPL states that it agrees that the 20 percent threshold should
be replaced by a 35 percent threshold in the market share screen and
argues that such an increase will avoid the false-positive failure rate
of the indicative screens, and the cost, time and repercussions in the
financial markets of the extended pendency of a market-based rate
renewal proceeding while a DPT is conducted and considered.\65\
---------------------------------------------------------------------------

    \65\ PPL reply comments at 7.
---------------------------------------------------------------------------

    85. In reply, APPA/TAPS state that there is no reason to raise the
market share indicative screen threshold above 20 percent simply
because investor-owned utilities have trouble passing the market share
indicative screen.\66\ NRECA and TDU Systems note that the factors that
EEI believes make it difficult to pass the indicative screens--a large
amount of reserves and little available transfer capability--are
precisely the factors to consider when evaluating whether a market is
competitive.\67\
---------------------------------------------------------------------------

    \66\ APPA/TAPS reply comments at 12.
    \67\ NRECA reply comments at 16, TDU Systems reply comments at
10, citing EEI at 8.
---------------------------------------------------------------------------

    86. Rather than raising the threshold level, TDU Systems propose to
lower the threshold to 15 percent for the market share indicative
screen, claiming that 20 percent was never justified by the Commission
or shown to be the right balance.\68\ Citing Commission and judicial
precedent, TDU Systems also note that the grant of market-based rate
authority cannot be made without the discipline of market forces.\69\
---------------------------------------------------------------------------

    \68\ TDU Systems at 7.
    \69\ TDU Systems at 5.
---------------------------------------------------------------------------

    87. These commenters cite a recent decision of the U.S. Court of
Appeals for the Ninth Circuit \70\ to buttress their positions, arguing
that even market shares lower than 20 percent can lead to market
manipulation.
---------------------------------------------------------------------------

    \70\ Pub. Utils. Comm'n of Calif. v. FERC, 462 F.3d 1027, at
1039 (9th Cir. 2006) (CPUC) (``As became clear in hindsight, even
those who controlled a relatively small percentage of the market [in
the California market during 2000 and 2001] had sufficient market
power to skew markets artificially.'').
---------------------------------------------------------------------------

    88. In reply to these arguments, Duke states that certain
commenters' reliance on this is mistaken because that decision
addressed market manipulation, not market power.\71\ Duke asserts that
virtually any supplier, regardless of its market share, has some
ability to manipulate market outcomes by engaging in anomalous bidding
practices.
---------------------------------------------------------------------------

    \71\ Duke reply comments at 18, citing CPUC.
---------------------------------------------------------------------------

Commission Determination
    89. The Commission will retain the 20 percent market share
threshold for the indicative market share screen. EEI and others argue
that the Commission should use a 35 percent threshold as a presumption
of market power because the DOJ merger guidelines state that only firms
with 35 percent or more market share have market power. As the
Commission stated in the July 8 Order, however, in a market comprised
of five equal-sized firms with 20 percent market shares, the HHI is
2,000, which is above the DOJ/FTC HHI threshold of 1,800 for a highly
concentrated market, and in markets for commodities with low demand
price-responsiveness like electricity, market power is more likely to
be present at lower market shares than in markets with high demand
elasticity.\72\ Therefore, we will retain a conservative 20 percent
threshold for this indicative screen.
---------------------------------------------------------------------------

    \72\ July 8 Order, 108 FERC ] 61,026 at P 96.
---------------------------------------------------------------------------

    90. When arguing that a 20 percent threshold for the market share
screen is too low, E.ON. U.S. and PNM/Tucson ignore that the indicative
screens are based on uncommitted capacity, not total capacity. When
calculating uncommitted capacity for the market share screen, a seller
deducts from its total capacity the capacity dedicated to long-term
sales contracts, operating reserves,\73\ planned outages, and native
load \74\ as measured by the appropriate native load proxy. As a
result, a substantial amount of seller capacity may not be counted in
measures of market share. Therefore, it is inappropriate to compare
market shares based on uncommitted capacity to the market shares in the
cases that E.ON. U.S. and PNM/Tucson cite.
---------------------------------------------------------------------------

    \73\ April 14 Order 107 FERC ] 61,018 at P 94.
    \74\ Id. at P 100.
---------------------------------------------------------------------------

    91. We further note that other commenters have argued that the 20
percent threshold is too high. We disagree. The 20 percent threshold is
meant to strike a balance between having a conservative but realistic
screen and imposing undue regulatory burdens. The Commission's
experience in the context of market-based rate proceedings demonstrates
this point. In the three years since the April 14 Order, the Commission
has revoked the market-based rate authority of two sellers, thirteen
sellers relinquished their market-based rate authority, and six
companies satisfied the Commission's concerns for the grant of market-
based rate authority at the DPT phase. In addition, intervenors have
the opportunity to present other evidence such as historical data in
order to rebut the presumption that sellers lack market power.\75\
Moreover, no commenter advocating a 15 percent threshold for the market
share has shown why it is superior to the current 20 percent threshold.
Therefore, we find that the 20 percent market share threshold strikes
the right balance in seeking to avoid both ``false negatives'' and
``false positives'' and we will not reduce the wholesale market share
screen to 15 percent, as suggested by TDU Systems.
---------------------------------------------------------------------------

    \75\ Id. at P 97.
---------------------------------------------------------------------------

    92. The Commission does not accept Duke's assertion that the market
share indicative screen is incompatible with regional planning
requirements. The April 14 Order allows operating reserves necessary
for reliability, as determined by State or regional reliability
councils,\76\ to be deducted from total capacity attributed to the
seller.
---------------------------------------------------------------------------

    \76\ April 14 Order, 107 FERC ] 61,018 at P 96.
---------------------------------------------------------------------------

    93. We also reject the argument that the 20 percent threshold is
too low because of native load obligations of investor-owned utilities
outside of RTOs. First, the calculation of 20 percent is the same
regardless of whether a seller is located in an RTO or not. Second, as
discussed herein, we allow for a native load deduction in the wholesale
market share screen and are increasing the deduction to address
concerns raised by investor-owned utilities and others. Given the
increased native load deduction, our market share screen adequately
incorporates investor-owned utilities' native load obligations while
necessarily maintaining the conservative nature of the screens.
b. Pivotal Supplier Application Period
Comments
    94. Some commenters recommend that the pivotal supplier indicative
screen should be applied monthly, rather than just in a seller's peak
month. They reason that sellers, though not pivotal in the highest
demand period, might be pivotal at different times of the year or in
off-peak periods, such as in the spring or fall when power plants are
on planned outages.\77\
---------------------------------------------------------------------------

    \77\ See, e.g. APPA/TAPS at 66-67, NRECA at 19-20.
---------------------------------------------------------------------------

Commission Determination
    95. The Commission will not require the pivotal supplier indicative
screen to be applied monthly, as some commenters suggest, because we
believe

it is unnecessary and overly burdensome to do so. Even though
conditions of tight supply may occur at other times of the year or in
abnormal operating conditions, the combination of the pivotal supplier
analysis and the wholesale market share screen is sufficient, because
suppliers with market power at such times are also likely to fail at
least one of these screens. Moreover, if intervenors believe that a
seller is pivotal during non-peak periods, they are permitted to file
evidence to that effect. Accordingly, using only the peak month in the
pivotal supplier indicative screen is appropriate. We note that if a
seller fails the indicative screens and submits a DPT, it is required
to provide a pivotal supplier analysis for each season and for both
peak and non-peak hours.
3. DPT Criteria
Commission Proposal
    96. With regard to the DPT analysis, the Commission proposed to
retain the current thresholds (20 percent for the market share analysis
and 2,500 for the HHI analysis), as well as the current practice of
weighing all the relevant factors presented in determining whether a
seller does or does not have horizontal market power. The Commission
proposed to continue to do so on a case-by-case basis, weighing such
factors as available economic capacity, economic capacity, market
share, HHIs, and historical sales and transmission data.\78\
---------------------------------------------------------------------------

    \78\ Economic capacity means the amount of generating capacity
owned or controlled by a potential supplier with variable costs low
enough that energy from such capacity could be economically
delivered to the destination market. Available economic capacity
means the amount of generating capacity meeting the definition of
economic capacity less the amount of generating capacity needed to
serve the potential supplier's native load commitments. See
generally April 14 Order, 107 FERC ] 61,018 at Appendix F.
---------------------------------------------------------------------------

Comments
    97. Several commenters suggest changes to the DPT criteria. One
suggested change is to emphasize \79\ or rely exclusively \80\ on the
available economic capacity measure, in order to properly account for
native load. For example, one commenter argues that the economic
capacity prong of the DPT analysis is not a useful indicator of the
presence or absence of market power when applied to vertically
integrated utilities in their home control areas because that analysis
completely disregards native load obligations, making this prong
virtually unpassable by such utilities. This commenter also notes that
even using the available economic capacity measure, a seller with a
market share above 35 percent would fail the DPT ``even though there is
no real market power problem because the in-area wholesale customers
have access to ample supplies of competitively priced power.'' \81\ In
this regard, he argues that the DPT should be changed to take into
account ``competitive alternatives available for wholesale customers.''
\82\
---------------------------------------------------------------------------

    \79\ Dr. Pace at 9.
    \80\ Southern at 20-21, EEI at 15.
    \81\ Dr. Pace at 11-12.
    \82\ Dr. Pace at 12-13.
---------------------------------------------------------------------------

    98. Several other commenters disagree with the 2,500 HHI threshold
for the DPT. Some reason that a 2,500 HHI threshold is not well
justified and that an 1,800 HHI threshold is more appropriate because
this is the criterion used in a highly concentrated market. They argue
that if a 2,500 HHI threshold is used, it should be used with a 15
percent market share because these are the criteria of the oil-pipeline
test from which the HHI 2,500 criterion is obtained.\83\ State AGs and
Advocates note that the Commission has never systematically attempted
to correlate the results of the pivotal supplier indicative screen, the
market share indicative screen, or the DPT (including HHI results)
proposed in the NOPR with actual independently derived data and
measures as to the existence of market power in any wholesale
electricity market in the U.S.\84\ Without having done this type of
systematic and quantitative evaluation of the proposed market power
tests based on some type of independent verification, State AGs and
Advocates contend that the Commission cannot be confident that the
three proposed tests are reasonably accurate and, therefore, useful
tests to determine the existence of market power in any electricity
market. For example, State AGs and Advocates ask how the Commission
knows if an HHI corresponds to the point at which market power begins,
and whether it varies by factors such as input price, generation mix
and different market structures through the country.\85\
---------------------------------------------------------------------------

    \83\ APPA/TAPS at 78-79, TDU Systems at 18, Montana Counsel at
15 (referring to APPA/TAPS comments).
    \84\ State AGs and Advocates state that by ``independently''
derived measures of market power they mean measures derived using
different methodologies (and more accurate methodologies) than the
Commission proposed in the NOPR.
    \85\ States AGs and Advocates at 36-37.
---------------------------------------------------------------------------

    99. Furthermore, State AGs and Advocates claim that the DPT is not
an adequate tool for assessing market power ``in any context.'' First,
they state that the DPT will not discern bidding strategies of
different suppliers. In addition, they assert that a DPT does not
consider the differences between fundamentally different types of
market structures: short-term energy only markets, short-term capacity
markets, ancillary service markets, and long-term contract markets for
energy and capacity.\86\
---------------------------------------------------------------------------

    \86\ State AGs and Advocates reply comments at 6-7.
---------------------------------------------------------------------------

    100. A number of commenters believe that the HHI threshold
sufficient for passage of the DPT should remain at 2,500.\87\ PPL
states that lowering the HHI threshold to 1,800 will cause more false
positives and direct capital away from the generation sector.
---------------------------------------------------------------------------

    \87\ MidAmerican reply comments at 2, citing EEI comments; PPL
reply comments at 8; EEI reply comments at 23.
---------------------------------------------------------------------------

    101. EEI and Progress Energy recommend that only the pivotal
supplier and HHI analyses of the DPT should be retained, particularly
if the market share analysis under the indicative screens is retained.
They argue that the pivotal supplier and HHI analyses are more than
sufficient to determine whether the potential for market power
exists.\88\
---------------------------------------------------------------------------

    \88\ EEI at 10-12, Progress at 8.
---------------------------------------------------------------------------

    102. A few commenters are skeptical about the need for a DPT.
Southern states that ``granting market-based rates should not require
the same analysis as for a merger,'' and that the Commission should
reconsider using the DPT.\89\ In this regard, Southern argues that
unlike mergers, which are difficult and costly to undo, the Commission
has the ability to continuously police the exercise of market power.
Further, Southern states that the Energy Policy Act of 2005 provides
for stiff civil and criminal penalties. Southern adds that the
Commission recently issued new rules against market manipulation to
thwart exercises of market power.
---------------------------------------------------------------------------

    \89\ Southern at 19-20.
---------------------------------------------------------------------------

    103. AARP expresses concern about the lack of competition in
wholesale electric markets. It argues that market-based rate reviews
are intended to determine whether the seller's market-based rates will
be just and reasonable, not whether a seller passes the various tests.
AARP argues that real-world evidence that may not fit neatly within the
specified market-based rate criteria must be considered before the
Commission can conclude that a seller lacks market power. AARP states
that, as the NOPR recognizes (PP 63-64), both historical and forward-
looking evidence should be considered.
Commission Determination
    104. The Commission will continue to use the DPT for companies that
fail the

market power indicative screens. The DPT is a well-established test
that has been used routinely by the Commission to analyze market power
in the merger context. The fact that it is used in section 203 cases
does not demonstrate that it is inappropriate for market-based rate
cases. Rather, it provides a well-established tool for assessing market
power that is known and widely used in the electric industry. Moreover,
in both contexts, the DPT allows for the calculation of market shares
and market concentration values under a wide range of season and load
conditions.
    105. Sellers failing one or more of the initial screens will have a
rebuttable presumption of market power. If such a seller chooses not to
proceed directly to mitigation, it must present a more thorough
analysis using the DPT. The DPT is also used to analyze the effect on
competition for transfers of jurisdictional facilities in section 203
proceedings,\90\ using the framework described in Appendix A of the
Merger Policy Statement and revised in Order No. 642.\91\
---------------------------------------------------------------------------

    \90\ 16 U.S.C. 824b (2000).
    \91\ Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act: Policy Statement, Order No. 592, 61 FR 68,595
(1996), FERC Stats. & Regs., Regulations Preambles July 1996-
December 2000 ] 31,044 (1996), reconsideration denied, Order No.
592-A, 62 FR 33,341 (1997), 79 FERC ] 61,321 (1997) (Merger Policy
Statement); see also Revised Filing Requirements Under Part 33 of
the Commission's Regulations, Order No. 642, 65 FR 70,983 (2000),
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ]
31,111 (2000), order on reh'g, Order No. 642-A, 66 FR 16,121 (2001),
94 FERC ] 61,289 (2001).
---------------------------------------------------------------------------

    106. The DPT defines the relevant market by identifying potential
suppliers based on market prices, input costs, and transmission
availability, and calculates each supplier's economic capacity and
available economic capacity for each season/load condition.\92\ The
results of the DPT can be used for pivotal supplier, market share and
market concentration analyses.
---------------------------------------------------------------------------

    \92\ Super-peak, peak, and off-peak, for Winter, Shoulder and
Summer periods and an additional highest super-peak for the Summer.
---------------------------------------------------------------------------

    107. Using the economic capacity for each supplier, sellers should
provide pivotal supplier, market share and market concentration
analyses. Examining these three factors with the more robust output
from the DPT will allow sellers to present a more complete view of the
competitive conditions and their positions in the relevant markets.
    108. Under the DPT, to determine whether a seller is a pivotal
supplier in each of the season/load conditions, sellers should compare
the load in the destination market to the amount of competing supply
(the sum of the economic capacities of the competing suppliers). The
seller will be considered pivotal if the sum of the competing
suppliers' economic capacity is less than the load level (plus a
reserve requirement that is no higher than State and Regional
Reliability Council operating requirements for reliability) for the
relevant period. The analysis should also be performed using available
economic capacity to account for sellers' and competing suppliers'
native load commitments. In that case, native load in the relevant
market would be subtracted from the load in each season/load period.
The native load subtracted should be the average of the native load
daily peaks for each season/load condition.
    109. Each supplier's market share is calculated based on economic
capacity. The market shares for each season/load condition reflect the
costs of the sellers' and competing suppliers' generation, thus giving
a more complete picture of the sellers' ability to exercise market
power in a given market. For example, in off-peak periods, the
competitive price may be very low because the demand can be met using
low-cost capacity. In that case, a high-cost peaking plant that would
not be a viable competitor in the market would not be considered in the
market share calculations, because it would not be counted as economic
capacity in the DPT. Sellers must also present an analysis using
available economic capacity and explain which measure more accurately
captures conditions in the relevant market.
    110. Under the DPT, sellers must also calculate the market
concentration using the HHI based on market shares.\93\ HHIs have been
used in the context of assessing the impact of a merger or acquisition
on competition. However, as noted by the U.S. Department of Justice in
the context of designing an analysis for granting market-based pricing
for oil pipelines, concentration measures can also be informative in
assessing whether a supplier has market power in the relevant market.
``The Department and the Commission staff have previously advocated an
HHI threshold of 2,500, and it would be reasonable for the Commission
to consider concentration in the relevant market below this level as
sufficient to create a rebuttable presumption that a pipeline does not
possess market power.'' \94\
---------------------------------------------------------------------------

    \93\ The HHI is the sum of the squared market shares. For
example, in a market with five equal size firms, each would have a
20 percent market share. For that market, HHI = (20) \2\ + (20) \2\
+ (20) \2\ + (20) \2\ + (20) \2\ = 400 + 400 + 400 + 400 + 400 =
2,000.
    \94\ See Comments of the United States Department of Justice in
response to Notice of Inquiry Regarding Market-Based Ratemaking for
Oil Pipelines, Docket No. RM94-1-000 (January 18, 1994).
---------------------------------------------------------------------------

    111. A showing of an HHI less than 2,500 in the relevant market for
all season/load conditions for sellers that have also shown that they
are not pivotal and do not possess a 20 percent or greater market share
in any of the season/load conditions would constitute a showing of a
lack of market power, absent compelling contrary evidence from
intervenors. Concentration statistics can indicate the likelihood of
coordinated interaction in a market. All else being equal, the higher
the HHI, the more firms can extract excess profits from the market.
Likewise a low HHI can indicate a lower likelihood of coordinated
interaction among suppliers and could be used to support a claim of a
lack of market power by a seller that is pivotal or does have a 20
percent or greater market share in some or all season/load conditions.
For example, a seller with a market share of 20 percent or greater
could argue that that it would be unlikely to possess market power in
an unconcentrated market (HHI less than 1,000). As with our initial
screens, sellers and intervenors may present evidence such as
historical wholesale sales. Those data could be used to calculate
market shares and market concentration and could be used to refute or
support the results of the DPT. The Commission encourages the most
complete analysis of competitive conditions in the market as the data
allow.
    112. We will continue to weigh both available economic capacity and
economic capacity when analyzing market shares and HHIs. Based on our
substantial experience in applying the DPT over the past decade, we
have found that both analyses are useful indicators of suppliers'
potential to exercise market power, and we are unwilling to rely solely
on one measure or the other.\95\ For example, in markets where
utilities retain significant native load obligations, an analysis of
available economic capacity may more accurately assess an individual
seller's competitiveness, as well as the overall competitiveness of a
market, because available economic capacity recognizes the native load
obligations of the sellers. On the other hand, in markets where the

sellers have been predominantly relieved of their native load
obligations, an analysis of economic capacity may more accurately
reflect market conditions and a seller's relative size in the market.
---------------------------------------------------------------------------

    \95\ See, e.g., Tampa Electric Company, 117 FERC ] 61,311
(2006); PacifiCorp, 115 FERC ] 61,349 (2005); Tucson Electric Power
Company, 116 FERC ] 61,051(2006); Duke Power, a Division of Duke
Energy Corporation, 111 FERC ] 61,506 (2005); and Kansas City Power
and Light Company, 113 FERC ] 61,074 (2005).
---------------------------------------------------------------------------

    113. Likewise, we find the HHI market concentration measure to be
useful in assessing the market power of individual sellers, and it
complements the market share and pivotal supplier measures in the DPT
stage of the analysis. Furthermore, no commenter has presented a
compelling argument for why the Commission should lower or raise the
HHI threshold in the DPT. Accordingly, we will retain 2,500 as the
appropriate threshold for passing this part of the DPT for the reasons
we stated in the April 14 Order.\96\ We will not adopt the suggestion
to lower the market share threshold to 15 percent from 20 percent, for
the reasons set forth above, in the NOPR and July 8 Order.\97\
Commenters have presented no compelling reason to do so, and in our
experience since the April 14 Order, we have not seen cases where the
HHI was over 2,500 and the seller's market share was between 15 and 20
percent, which would be the type of situation about which APPA/TAPS and
others are concerned. Accordingly, such a reform would not likely
result in additional findings of market power.
---------------------------------------------------------------------------

    \96\ April 14 Order, 107 FERC ] 61,018 at P 111 (explaining that
at less than 2,500 HHI in the relevant market for all season/load
conditions there is little likelihood of coordinated interaction
among suppliers in a market).
    \97\ July 8 Order at P 95-97 and NOPR at P 41.
---------------------------------------------------------------------------

    114. State AGs and Advocates claim that the DPT is not an adequate
tool for assessing market power because it will not discern bidding
strategies of different suppliers. However, State AGs and Advocates
miss the point of the analysis: by determining whether a seller has
capacity that can compete in the market under various season and load
conditions, the DPT provides an accurate picture of market conditions.
Examining market conditions allows the Commission to determine whether
a seller has market power. The DPT does this by examining short-term
energy markets and, in particular, sellers' available generation
capacity. In addition, absent entry barriers, and a specific finding of
market power, the Commission has said that long-term markets are
competitive. With regard to ancillary services, as discussed herein,
the Commission requires market power analyses for those services to
support a request for market-based rate authority. Assessing competing
suppliers' bidding strategies, ex ante, would not illuminate the state
of the market and the ability of sellers to alter prices within it.
    115. We also reject Southern's argument that the DPT analysis is
unnecessary because of the Commission's enhanced civil penalty
authority and continuing policing of sellers with market-based rate
authorization. While those are critical components of our program to
ensure just and reasonable market-based rates, they are not a
substitute for an analysis of the potential market power of sellers
seeking market-based rate authority. In addition, Southern's argument
that rules against market manipulation will thwart all exercises of
market power is speculative.
    116. We will not change the DPT to take into account competitive
alternatives available for wholesale customers as proposed by a
commenter. We stated above our reasons for rejecting use of a
contestable load analysis in the indicative screens, and we reject it
for the DPT for the same reasons.
    117. AARP and State AGs and Advocates argue that the Commission
should consider evidence from actual market data in determining whether
market power exists rather than rely on the results of the DPT to
determine whether a seller has market power. We agree that actual
market data is an important part of a determination of whether a seller
may have market power. In this regard, we look at actual market data,
both in the initial analysis and in ongoing monitoring of the EQR data.
As the Commission stated in the April 14 Order, ``[a]s with our initial
screens, applicants and intervenors may present evidence such as
historical wholesale sales. Those data could be used to calculate
market shares and market concentration and could be used to refute or
support the results of the Delivered Price Test.'' \98\ In addition, as
part of our ongoing monitoring activities, we examine the EQR data in
an effort to identify whether market prices may indicate an exercise of
market power.