SIL study assumed that ``all reservations historically controlled by
non-affiliates would have been used to compete to inject energy into
the transmission provider's control area market if market power or
scarcity was driving market prices above other regional prices.''
However, if the holder of the reservation is using the transfer
capability to serve its own load, it will not be available to third
parties to respond to a price increase on the part of the transmission
provider/sellers. APPA/TAPS state that presumably the capacity
resources associated with the import will be reflected in the capacity
total of the party that controls the resource's output. Excluding the
transfer capability associated with the resource will not result in a
double-deduction. Rather, failing to exclude the transfer capability
will result in a double-counting of competing supply. Thus, APPA/TAPS
assert that the Commission should revise the treatment of transfer
capability held by third parties on a firm basis.\373\
---------------------------------------------------------------------------

    \373\ APPA/TAPS at 53.
---------------------------------------------------------------------------

Commission Determination
    368. The Commission agrees with Duke, EEI and Southern that short-
term firm reservations can be unpredictable, driven by real time system
conditions, and do not necessarily indicate that the associated
transmission capacity is not available for competing supplies (or to
import seller's supplies during the study periods). Accordingly, we
conclude that, in calculating simultaneous transmission import limits,
short-term firm reservations of 28 days or less in effect during the
study periods need not be accounted for.\374\ While we find that firm
transmission reservations less than or equal to 28 days in duration are
usually unpredictable, we believe that firm transmission reservations
of a longer duration are not related to the unpredictable nature of
real time events and are based upon planned and predictable events.
Therefore, the Commission will require sellers to account for firm and
network transmission reservations having a duration of longer than 28
days.\375\
---------------------------------------------------------------------------

    \374\ We understand that short-term firm reservations are often
used for unpredictable events and real-time system conditions. We
note that most unpredictable conditions that sellers hold short-term
firm reservations for, including generator forced outages and
weather events, are less than one month in duration. Accordingly, we
will allow applicants to not account for short-term firm
reservations of one month or less, and since the shortest month is
28 days long, we are setting this limit at 28 days. Any firm
reservation longer than 28 days in duration must continue to be
accounted for in the SIL study.
    \375\ The simultaneous import limit study must account for
short-term firm transmission rights including point-to-point on-
peak/off-peak transmission reservations (firm or network
transmission commitments) which have been stacked, or successively
arranged, into an aggregated point-to-point transmission reservation
longer than 28 days.
---------------------------------------------------------------------------

    369. With regard to APPA/TAPSs' concern, we clarify that the
seller's firm, network, and grandfathered transmission reservations
longer than 28 days, including reservations for designated resources to
serve retail load, shall be fully accounted for in the simultaneous
import limit study. We further clarify that reservations held by third
parties to import power into the seller's home area should be accounted
for by allocating transmission import capability to those parties, and
then allocating the remaining SIL pro rata.
d. Allocation of Transmission Imports Based on Pro Rata Shares of
Seller's Uncommitted Generation Capacity
Comments
    370. Duke and EEI support the Commission proposal to allocate
imports on a pro rata basis into a study area based on uncommitted
capacity in surrounding areas.\376\
---------------------------------------------------------------------------

    \376\ Duke at 26-29, EEI at 25-26.
---------------------------------------------------------------------------

    371. However, Powerex expresses concern that pro rata allocation of
uncommitted capacity is not a realistic representation of the physical
capability of the system, since pro rata allocation assumes that the
system can import up to the simultaneous import limit over any
combination of transmission paths. Powerex argues that, in reality,
some paths become constrained before others, so the allocation of
import capability should take account of the physical limitations of
the transmission system. Powerex asks that the Commission allow sellers
to use allocation methods that are consistent with physical system
limitations, where sellers provide documentation showing that the
allocation methods used in the screens are realistic or
conservative.\377\
---------------------------------------------------------------------------

    \377\ Powerex at 24-25.
---------------------------------------------------------------------------

    372. Morgan Stanley asks the Commission to clarify its proposal of
allocating transmission imports pro rata between the seller and its
competitors based on uncommitted capacity. Morgan Stanley wonders if
the Commission made a typographical error and intended to propose an
allocation based on committed capacity. Morgan Stanley believes only
the transmission provider (seller) would have uncommitted
capacity.\378\
---------------------------------------------------------------------------

    \378\ Morgan Stanley at 15.
---------------------------------------------------------------------------

Commission Determination
    373. The Commission agrees with Duke and EEI that the current
practice of allocating simultaneous import

capability pro rata to sellers based on uncommitted capacity should be
continued.\379\ However, some clarification may be helpful.
---------------------------------------------------------------------------

    \379\ Allocation of the simultaneous transmission import
capability, into the seller's market, to affiliated and unaffiliated
uncommitted first-tier generation is done in the indicative screen,
after conducting the SIL study, in order to estimate uncommitted
capacity market shares from first-tier balancing authority areas.
---------------------------------------------------------------------------

    374. Powerex raises concern over the pro rata allocation of
uncommitted generation capacity and asserts that this is not a
realistic representation of the physical capability of the system since
pro rata allocation assumes that the system can import up to the
simultaneous import limit over any combination of transmission paths.
In this regard, we note that pro rata allocation of transmission
capacity based on first-tier uncommitted generation capacity is an
approximation and is consistent with the manner in which we conduct the
SIL study. In particular, when determining the simultaneous import
limit, first-tier balancing authority areas are combined into a single
area. The import capability of the study area is the simultaneous
transfer limit from the aggregated first-tier market area into the
study area.\380\ We then allocate imports based on transmission
capacity (limited by the physical capabilities of the transmission
system as determined by the SIL study) pro rata based on sellers'
first-tier uncommitted generation capacity.\381\ We recognize that such
an approximation may not fit all cases. Accordingly, with regard to
allocating transmission imports, sellers can submit additional
sensitivity studies based on factors suggested by Powerex, and
intervenors may rebut the allocations of import capability made by
seller. The Commission will consider such arguments on a case-by-case
basis.
---------------------------------------------------------------------------

    \380\ April 14 Order, 107 FERC ]61,018 at Appendix E.
    \381\ The SIL study also accounts for transmission reservations
when determining the amount of imports available to reach the study
area as discussed herein and in the April 14 and July 8 Orders.
---------------------------------------------------------------------------

    375. Morgan Stanley asks if the Commission made a typographical
error and intended to propose an allocation based on committed capacity
rather than uncommitted capacity. The Commission clarifies that pro
rata allocation is used to assign shares of simultaneous transmission
import capability to uncommitted generation capacity in the aggregated
first-tier balancing authority areas to determine how much uncommitted
generation capacity can enter the study area. Morgan Stanley appears to
confuse our use of the term uncommitted capacity, apparently believing
we are referring to uncommitted transmission capacity. That is not the
case as we are referring to uncommitted generation capacity. The reason
the use of uncommitted generation capacity is appropriate is because
our screens analyze seller's relative uncommitted generation capacity
rather than installed generation capacity or, as suggested by Morgan
Stanley, committed generation capacity. In particular, the SIL study
determines the amount of simultaneous transmission capacity available
to be imported by competing supplies from remote resources in first-
tier markets. The supplies that are available to be imported and thus
compete are necessarily ``uncommitted.'' Further, it is our experience
that uncommitted generation capacity can be held by any number of
market participants based on market conditions at a given time. In
other words, we do not agree with an assumption that the transmission
provider is likely to be the only market participant with uncommitted
power supplies.
e. Miscellaneous Comments
Comments
    376. PG&E states that RTOs/ISOs having knowledge and control over
the entire control area are best suited to perform SIL studies. PG&E
requests that the Commission allow an exemption where, in the absence
of an accepted SIL study by an RTO/ISO, the seller may substitute
historical import levels in place of the SIL study. In addition, PG&E
requests that the Commission confirm that sellers that pass screens for
each relevant geographic market without considering imports need not
provide a simultaneous import analysis.\382\
---------------------------------------------------------------------------

    \382\ PG&E at 11-12. PG&E also requests that the Commission
clarify how to perform the simultaneous import limitation to avoid
the need for repetitive studies. However, PG&E did not specify what
clarification was sought in this regard.
---------------------------------------------------------------------------

    377. Powerex has concerns about how feasible it is for marketers to
obtain non-public data from their transmission provider that is needed
to conduct a screen (e.g., a SIL study) on their own. Powerex notes
that Bonneville Power Administration (BPA) and Northwest Power Pool
(NWPP) do not, as a practice, conduct and post simultaneous
transmission import capability studies. Therefore, Powerex asserts that
the Commission should maintain the current flexibility of allowing
marketers to submit credible proxy study calculations based on publicly
available information.\383\
---------------------------------------------------------------------------

    \383\ Powerex at 5-25.
---------------------------------------------------------------------------

Commission Determination
    378. The Commission will continue to require the SIL study for the
indicative screens and DPTs in order to assure that restrictions
regarding importing first-tier supply are captured for seasonal peak
conditions. Benefits of using a uniform transmission import model
include: Transparency, consistency, clarity, and reasonable assurance
that system conditions have been adequately captured. As also stated
above, the Commission provides sellers flexibility to provide
sensitivity analyses by modifying inputs to the SIL study.
    379. In regard to PG&E's belief that RTOs/ISOs are best equipped to
conduct SIL calculations, the Commission will continue to require
transmission-providing sellers to perform the SIL studies as necessary.
To the extent that an RTO/ISO conducts transmission studies and makes
that information available, a seller may rely on the information
obtained from its RTO/ISO to conduct its SIL study. Further, the
Commission clarifies that to the extent the transmission-owning seller
can demonstrate it passes the screens for each relevant geographic
market without considering imports, it need not submit a SIL
study.\384\
---------------------------------------------------------------------------

    \384\ April 14 Order, 107 FERC ] 61,018 at P 85.
---------------------------------------------------------------------------

    380. Powerex requests that it be able to submit proxies in place of
a SIL study. The Commission notes that transmission-providing sellers
are required to be the first to file SIL studies, which makes the
required data available to non-transmission owning sellers for use in
performing their generation market power analyses.\385\ However, as the
Commission stated in the April 14 Order,

    \385\ July 8 Order, 108 FERC ] 61,026 at 46.

an applicant may provide a streamlined application to show that it
passes our screens. Thus, with respect to simultaneous import
capability, if an applicant can show that it passes our screens for
each relevant geographic market without considering imports, no such
simultaneous import analysis needs to be provided. Further, we
recognize that certain applicants will not have the ability to
perform a simultaneous import capability study. Accordingly, if an
applicant demonstrates that it is unable to perform a simultaneous
import study for the control area in which it is located, the
applicant may propose to use a proxy amount for transmission limits.
---------------------------------------------------------------------------
We will consider such proposals on a case-by-case basis.\386\

    \386\ April 14 Order, 107 FERC ] 61,018 at P 85.

    381. In this regard, we note that we have accepted proxy amounts
for

transmission limits and will continue to consider such requests on a
case-by-case basis.\387\
---------------------------------------------------------------------------

    \387\ See, e.g., Tampa Electric Co., 110 FERC ] 61,026 at P 32
(2005) (using the largest ATC into the control area at the time the
study is conducted is a conservative assumption for import
capability and an acceptable proxy for the SIL study).
---------------------------------------------------------------------------

f. Required SIL Study for DPT Analysis
Comments
    382. EEI and Southern propose that the Commission not mandate SIL
studies as the only method for calculating import limits for DPT
analysis. EEI states that while such a study may be an appropriate tool
for indicative screens, the DPT is a more comprehensive study and the
Commission should allow for more precise, non-standardized approaches
for calculating simultaneous import capability for use in the DPT.\388\
Southern states that the apparent purpose of Appendix E is to provide a
somewhat standardized approach to assessing simultaneous import
capability that goes hand-in-hand with the simplified tools used to
develop a preliminary assessment of generation market power. It argues
that where a seller presents a more thorough generation analysis
pursuant to a DPT, it should be permitted to offer a more thorough
analysis of transmission import capability.\389\
---------------------------------------------------------------------------

    \388\ EEI at 24-25.
    \389\ Southern at 4, 37-38.
---------------------------------------------------------------------------

    383. NRECA responds that the Commission should not allow sellers to
substitute alternative measures of simultaneous import capability in
the DPT. NRECA states that while a seller should be allowed to conduct
a SIL study that is more refined than the one required of all sellers,
``the applicant's alternative analysis should be submitted in addition
to, and not in lieu of, the required analysis'' in the DPT.\390\ It
argues that otherwise, each seller will do the analysis a bit
differently so that the analysis will favor passing the tests.
According to NRECA, the worst-case scenario is that there will be no
standardized approach, which would exacerbate the existing problems
created by inadequate access to the data underlying the sellers' market
power analysis and the lack of standard reporting and increase the
burdens on intervenors and the Commission staff in evaluating
applications for market-based rates and market power updates. NRECA
states that one advantage of requiring all sellers to use a standard
analysis, in addition to whatever other analysis they may choose to
offer, is that it can more effectively bring to light the problems now
hidden from view in the seller's historical practices, resulting in
increased transparency.
---------------------------------------------------------------------------

    \390\ NRECA reply comments at 24-25.
---------------------------------------------------------------------------

Commission Determination
    384. For the reasons stated herein regarding the need to as
accurately as possible account for transmission limitations when
considering power supplies that can be imported into the relevant
market under study, the Commission adopts the requirement for use of
the SIL study as a basis for transmission access for both the
indicative screens and the DPT analysis.
    385. The lack of flexibility in creating a simultaneous
transmission import limit has been identified by several commenters.
However, the Commission believes it has provided sellers sufficient
flexibility to adequately represent their process for making
transmission available to unaffiliated supply. The Commission shares
NRECA's concerns that opening the process to alternative study methods
without a specified standard may result in deviations from reasonable
depictions of transmission limits historically applied to first-tier
suppliers and will likely bias such studies to the benefit of the
seller.
    386. With regard to the DPT analysis, there are several primary
reasons for the continued use of simultaneous transmission import limit
studies: Uniformity of modeling affiliated and unaffiliated supply,
consideration of simultaneity, consideration of seller and affiliate
transmission commitments and reservations, consideration of all
internal transmission limitations, consideration of all external
transmission limitations existing in first-tier areas, consideration of
the seller's (or the seller's transmission provider's) practices for
posting ATC, and consideration of peak seasonal conditions. By
requiring the SIL study in the DPT analysis, the Commission assures
that all factors important in determining transmission access to the
seller's market are taken into account.
13. Procedural Issues
Commission Proposal
    387. In the NOPR, the Commission noted that Order No. 662 \391\
addressed concerns that CEII claims in market-based rate filings are
overbroad. In Order No. 662, the Commission stated that it is willing
to consider on a case-by-case basis requests for extensions of time to
prepare protests to market-based rate filings where an intervenor
demonstrates that it needs additional time to obtain and analyze CEII.
In Order No. 662, the Commission encouraged the parties in cases in
which CEII is filed to promptly negotiate a protective order governing
access to the CEII, or privately negotiate for the submitter to provide
the data to interested parties pursuant to an appropriate non-
disclosure agreement. The Commission sought comments in the NOPR on
whether CEII designations remain a concern since issuance of Order No.
662.
---------------------------------------------------------------------------

    \391\ Critical Energy Infrastructure Information, Order No. 662,
70 FR 37031 (June 28, 2005), FERC Stats. & Regs. Regulations
Preambles 2001-2005 ] 31,189 (June 21, 2005).
---------------------------------------------------------------------------

    388. The Commission also sought comments regarding whether the
comment period (generally 21 days from the date of filing) provided for
parties to file responses to the indicative screens and DPT analyses is
sufficient. The Commission asked what would be an appropriate comment
period if it were to establish a longer period for submitting comments
on indicative screen and DPT analyses.
Comments
    389. A number of commenters note that intervenors should be given
adequate time to respond to CEII designations. APPA/TAPS suggest that
the Commission provide a process to allow interested market
participants to obtain CEII authorization in advance of a region's
triennial updates. They submit that such authorization would apply to
all sellers in the region where market-based rate authority is up for
review and would necessitate that the requester file only one
request.\392\ Montana Counsel states that intervenors should also be
given adequate time to respond to confidentiality claims with regard to
non-CEII data.\393\
---------------------------------------------------------------------------

    \392\ APPA/TAPS at 35-36.
    \393\ Montana Counsel at 23-24.
---------------------------------------------------------------------------

    390. A number of commenters support extending the comment period
for market-based rate filings. Ameren supports a 30-day comment period
on the basis that 30 days has proven to be a sufficient comment period
for section 203 filings.\394\ Morgan Stanley recommends a 45-to 60-day
comment period if the Commission adopts a regional approach for updated
market power analyses.\395\ NRECA states that under a regional filing
process, a 21-day comment period is inadequate when several updated
market power analysis filings are reviewed at once, and instead
advocates a 90-day comment period from the notice of the filing or from
the

date of a completed filing if additional data is requested by the
Commission.\396\
---------------------------------------------------------------------------

    \394\ Ameren at 8.
    \395\ Morgan Stanley at 14.
    \396\ NRECA at 29.
---------------------------------------------------------------------------

Commission Determination
    391. In this Final Rule, we adopt procedures under which
intervenors in section 205 proceedings may obtain expedited access to
CEII or other information for which privileged treatment is sought. A
request for access to information for which CEII status or privilege
treatment has been claimed generally takes a few weeks for the
Commission to process under the standard process found in 18 CFR
388.112 and 388.113.\397\ Such a delay in receiving such information
may make it difficult for an intervenor to submit timely comments.
---------------------------------------------------------------------------

    \397\ This is due, in part, to the fact that the Commission's
regulations require notice and an opportunity for the submitter to
comment on the request. The Commission recently consolidated the
notice and opportunity to comment provision in 18 CFR 388.112(d)
with the notification prior to release found in 18 CFR 388.112(e).
See Critical Energy Infrastructure Information, Order No. 683, FERC
Stats. & Regs. ] 31,228 (2006).
---------------------------------------------------------------------------

    392. An expedited process does exist for section 203 filings.
Section 33.9 of the Commission's regulations \398\ states that a seller
seeking to protect any part of its application from public disclosure
must also submit a proposed protective order. Parties may sign the
proposed protective order and obtain CEII or privileged materials in a
more timely manner, without having to spend time negotiating the terms
of a protective order or waiting for the Commission to process the
request through its standard request process.
---------------------------------------------------------------------------

    \398\ 18 CFR 33.9.
---------------------------------------------------------------------------

    393. In order to ensure that intervenors have access in a timely
manner to relevant information for which privileged treatment is
claimed, we will adopt language similar to Sec.  33.9 in this Final
Rule, to be codified at 18 CFR 35.37(f). We intend that the proposed
protective order will be self implementing and not require action by
the Commission; once a party signs the proposed protective order and
returns it to the party submitting protected material, the submitter is
expected to provide the material promptly to the requester. We note
that the Commission's Model Protective Order is available on the
Commission's Internet site and may be used as a guide in preparing
proposed protective orders.\399\ To expedite processing, the regulation
will require that the seller provide the CEII or privileged material to
the requester within five days after the protective order is signed and
submitted to the seller.
---------------------------------------------------------------------------

    \399\ See http://www.ferc.gov/legal/admin-lit/model-protective-order.pdf
.

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

    394. With respect to APPA/TAPS's suggestion to make CEII
authorization region-wide to coincide with region-wide analysis, we do
not believe such a step is necessary or advisable at this time. Our
goal with CEII has always been to limit access to those with a
legitimate need for the information. We do not expect that all market
participants in a region will want to comment on all updated market
power analyses within that region. Moreover, we anticipate that our
regulatory change requiring submission of a proposed protective order
will go a long way to resolving past difficulties in obtaining non-
public information in a timely manner.
    395. With regard to the comment period for parties to file
responses to updated indicative screens, we believe, as we discuss
below in the section on Implementation, that extending the comment
period for regional updated market power analyses will allow
intervenors a better opportunity to review and comment on those
filings, especially considering the large number of filings that will
be submitted at one time. Hence, we will establish a 60-day comment
period for updated market power analyses that are filed in accordance
with the schedule in Appendix D.
    396. With regard to the comment period for initial applications and
for DPT analyses ordered as part of a section 206 proceeding, the
Commission will retain the current 21-day comment period. However, we
remain willing to consider on a case-by-case basis requests for
extensions of time beyond 21 days to submit comments on these filings.

B. Vertical Market Power

    397. In the NOPR, the Commission proposed to replace the existing
four-prong analysis (generation market power, transmission market
power, other barriers to entry, affiliate abuse/reciprocal dealing)
with an analysis that focuses on horizontal market power and vertical
market power. Accordingly, it proposed that issues relating to whether
the seller and its affiliates have transmission market power or whether
they can erect other barriers to entry be addressed together as part of
the vertical market power part of the analysis.
Comments
    398. As a general matter, commenters expressed support for the
proposed consolidation of the transmission market power and other
barriers to entry prong into one vertical market power analysis.\400\
According to EPSA, analyzing vertical market dominance in one single
prong could be a positive step, provided that the elements of the prong
are explicitly specified and effectively enforced.\401\ No commenter
opposed the Commission's proposal in this regard.
---------------------------------------------------------------------------

    \400\ See Duke at 30; Southern at 38-40; EPSA at 18-19.
    \401\ EPSA at 18-19.
---------------------------------------------------------------------------

Commission Determination
    399. In light of the reasons discussed in the NOPR and the comments
received, the Commission will adopt the NOPR proposal to consolidate
the transmission market power analysis and other barriers to entry
analysis into one vertical market power analysis.
1. Transmission Market Power
Commission Proposal
    400. In the NOPR, the Commission noted that it recognized that
Order No. 888 did not eliminate all potential to engage in undue
discrimination and preference in the provision of transmission
service,\402\ and that it had issued a Notice of Inquiry and a NOPR
regarding whether reforms are necessary to the Order No. 888 pro forma
OATT.\403\ The Commission concluded that any concerns regarding the
adequacy of the OATT should be addressed in that proceeding and not in
the MBR Rulemaking proceeding. Therefore, in the NOPR the Commission
proposed to continue to find that, where a seller or any of its
affiliates owns, operates or controls transmission facilities, a
Commission-approved OATT, as modified as a result of the OATT Reform
Rulemaking, will adequately mitigate transmission market power.
---------------------------------------------------------------------------

    \402\ In Order No. 2000, the Commission found that
``opportunities for undue discrimination continue to exist that may
not be remedied adequately by [the] functional unbundling [remedy of
Order No. 888]* * *'' Regional Transmission Organizations, Order No.
2000, FERC Stats. & Regs., Regulations Preambles July 1996-December
2000 ] 31,089 at 31,105 (1999), order on reh'g, Order No. 2000-A,
FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 ]
31,092 (2000), aff'd sub nom. Public Utility District No. 1 of
Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir. 2001).
    \403\ See Preventing Undue Discrimination and Preference in
Transmission Service, 70 FR 55796 (Sept. 23, 2005), FERC Stats. &
Regs., ] 35,553 (2005); Preventing Undue Discrimination and
Preference in Transmission Service, Notice of Proposed Rulemaking,
71 FR 32636 (Jun. 6, 2006), FERC Stats. & Regs. ] 32,603 (2006);
Preventing Undue Discrimination and Preference in Transmission
Service, Order No. 890, 72 FR 12266 (Mar. 15, 2007), FERC Stats. &
Regs. ] 31,241 (2007), reh'g pending.
---------------------------------------------------------------------------

    401. In the NOPR, the Commission further stated that the finding
that an

[[Continued on page 39953]]

]

[[pp. 39953-40002]] Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities

[[Continued from page 39952]]

OATT adequately mitigates transmission market power rests on the
assumption that individual sellers comply with their OATTs. If they do
not, violations of the OATT may be cause to revoke market-based rate
authority or to subject the seller to other remedies the Commission may
deem appropriate, such as disgorgement of profits or civil
penalties.\404\ However, before the Commission will consider revoking
an entity's market-based rate authority for a violation of the OATT,
there must be a nexus between the OATT violation and the entity's
market-based rate authority.
---------------------------------------------------------------------------

    \404\ NOPR at P 91 (citing The Washington Water Power Co., 83
FERC ] 61,282 (1998)).
---------------------------------------------------------------------------

    402. In addition, the Commission proposed that, if it determines,
as a result of a significant OATT violation, that the market-based rate
authority of a transmission provider will be revoked within a
particular market, each affiliate of the transmission provider that
possesses market-based rate authority will have it revoked in that same
market on the effective date of revocation of the transmission
provider's market-based rate authority.\405\
---------------------------------------------------------------------------

    \405\ NOPR at P 91.
---------------------------------------------------------------------------

a. OATT Requirement
Comments
    403. Several commenters state that merely having an OATT on file
does not sufficiently mitigate vertical market power and that a
utility's interpretation and implementation of its OATT can effectively
eviscerate market power protections.\406\ Some commenters do not
believe that tariff changes alone will effectively mitigate vertical
market power in the future and therefore request a post-implementation
proceeding one year after the issuance of a final rule in the OATT
Reform Rulemaking to explore the effectiveness of the updated OATT in
assessing vertical market power.\407\
---------------------------------------------------------------------------

    \406\ See, e.g., Suez/Chevron at 6; Reliant at 8.
    \407\ Suez/Chevron at 6; EPSA at 20.
---------------------------------------------------------------------------

    404. EPSA states that the outcome of the OATT Reform Rulemaking
will determine the strength and efficacy of the vertical market power
screen and stresses the interrelationship of that proceeding to this
proposed rule; EPSA continues to advocate that the reform of Order No.
888 and the ability of the OATT to mitigate against market power
effectively be evaluated on an ongoing basis.\408\
---------------------------------------------------------------------------

    \408\ EPSA reply comments at 2, 5.
---------------------------------------------------------------------------

    405. APPA/TAPS similarly state that, for purposes of the vertical
market power analysis, it is too early to tell whether the OATT, as
modified in the OATT Reform Rulemaking, will mitigate transmission
market power.\409\ TDU Systems argue that the proposals governing
transmission planning and expansion in the OATT Reform Rulemaking are
inadequate to mitigate the vertical market power of transmission-owning
public utilities.\410\
---------------------------------------------------------------------------

    \409\ APPA/TAPS at 6.
    \410\ TDU Systems at 24.
---------------------------------------------------------------------------

    406. The New York Commission states that the presence of an OATT
may mitigate a seller's transmission market power, but only with
respect to generator access to the transmission system. It submits that
vertically integrated utilities may be able to exercise transmission
market power in a manner that would not necessarily violate their
OATTs, such as through outage scheduling (e.g., delaying repair and
maintenance of transmission lines in a load pocket in which an
affiliated generator is located), transmission investment (e.g.,
delaying or minimizing its investment in the bulk electric transmission
system in a load pocket in which an affiliated generator is located),
or voltage support (e.g., inadequate support of voltage requirements
and being slow to correct voltage support shortcomings).\411\ EPSA
agrees with the New York Commission that the Commission cannot assume
that any transmission provider with a Commission-approved OATT on file
has adequately mitigated transmission market power and that ``the
Commission should require these utilities to demonstrate that they do
not have the incentive or ability to engage in such behavior, before
they are granted MBR status.'' \412\
---------------------------------------------------------------------------

    \411\ New York Commission at 2-4.
    \412\ EPSA reply comments at 5-6 (citing New York Commission at
2-4).
---------------------------------------------------------------------------

    407. On the other hand, several commenters support the Commission's
proposal to maintain the long-standing presumption that a Commission-
approved OATT will adequately mitigate transmission market power.\413\
EEI states that the comprehensive approach that the Commission has
taken to reform the OATT in the OATT Reform Rulemaking is the best
approach to assess the adequacy of the OATT to mitigate transmission
market power. EEI states that the Commission should continue to find
that a Commission-approved OATT, as modified as a result of the OATT
Reform Rulemaking, adequately mitigates transmission market power.\414\
---------------------------------------------------------------------------

    \413\ Duke at 29-32; EEI at 44-45; Southern at 38-40;
MidAmerican reply comments at 2.
    \414\ EEI reply comments at 31-35.
---------------------------------------------------------------------------

Commission Determination
    408. The Commission will adopt the NOPR proposal that, to the
extent that a public utility with market-based rates, or any of its
affiliates, owns, operates, or controls transmission facilities, the
Commission will require that a Commission-approved OATT be on file
before granting such seller market-based rate authorization. We
recognize that the Commission has granted a number of entities waiver
of the requirement to file an OATT where the filing entity satisfies
the Commission's standards for the grant of such waivers.\415\ The
Commission will continue to grant waiver of the OATT requirement on a
case-by-case basis, and will continue to allow sellers to rely on the
grant of such waiver to satisfy the vertical market power part of the
analysis. If a seller that previously received waiver of the OATT
requirement seeks to continue to rely on that waiver to satisfy the
vertical market power part of the analysis, it must make an affirmative
statement in its updated market power analysis that it previously
received such a waiver, that such waiver remains appropriate, and the
basis for that claim. In addressing our vertical market power concerns,
a seller, including its affiliates, that does not own, operate or
control transmission facilities must make an affirmative statement that
neither it, nor any of its affiliates, owns, operates or controls any
transmission facilities.
---------------------------------------------------------------------------

    \415\ Black Creek Hydro, Inc., 77 FERC ] 61,232 at 61,941 (1996)
(granting waiver of Order No. 888 for public utilities that can show
that they own, operate, or control only limited and discrete
transmission facilities (facilities that do not form an integrated
transmission grid), until such time as the public utility receives a
request for transmission service).
---------------------------------------------------------------------------

    409. In the NOPR, we stated that concerns regarding the adequacy of
the OATT should be addressed in the OATT Reform Rulemaking. The
Commission received over 6,000 pages of comments relating to potential
reforms to the pro forma OATT in that proceeding, and on February 16,
2007 issued a Final Rule adopting numerous improvements to the pro
forma OATT that will further limit opportunities for transmission
providers to unduly discriminate against transmission customers. As a
result, we do not address in this Final Rule specific reforms to the
OATT. In addition, the Commission declined in Order No. 890 to
establish a one-year review period for the reformed pro forma OATT. The
Commission stated it will continue to actively monitor compliance with
its orders and, as necessary, institute further proceedings

to meet its statutory obligation to remedy undue discrimination.\416\
---------------------------------------------------------------------------

    \416\ Order No. 890, FERC Stats. & Regs. ] 31,241 at P 42.
---------------------------------------------------------------------------

    410. In response to the concerns of the New York Commission and
EPSA that vertically integrated utilities may exercise vertical market
power without violating their OATTs through actions such as outage
scheduling, investment decisions and inadequate voltage support, we
note that the OATT does address such matters as the planning and
expansion of facilities, the duty to provide firm and non-firm service
and good utility practice. These provisions impose definite obligations
on transmission providers. As additional examples, outage scheduling
aimed at affecting market prices may constitute market manipulation,
and inadequate voltage support may violate a reliability standard under
FPA section 215. These provisions adequately address the concerns of
the New York Commission and EPSA.
b. OATT Violations and MBR Revocation
Comments
    411. A number of commenters agree with the Commission that market-
based rate authority should not be revoked unless and until the
Commission finds a direct nexus between the OATT violation and the
entity's market-based rate authority.\417\ EEI states that the
Commission should not presume that an OATT violation is sufficient
cause to revoke a transmission provider's market-based rate authority
because there is no basis for such a presumption.\418\ Instead, EEI
argues that the Commission should carefully review all facts and
circumstances before determining that an OATT violation was a willful
exercise in undue discrimination intended to benefit a seller's sales
at market-based rates.\419\
---------------------------------------------------------------------------

    \417\ EEI reply comments at 31-35; MidAmerican reply comments at
2. See also Duke at 29 (OATT violation should be a material
violation and related in some way to the seller exercising market
power).
    \418\ EEI reply comments at 31-35.
    \419\ EEI reply comments at 34; PNM/Tucson at 10-12.
---------------------------------------------------------------------------

    412. EPSA asserts that any violation of an entity's OATT in order
to favor its own sales or its affiliates would create a nexus to the
entity's market-based rate authority. If the Commission does not
clarify this point, EPSA requests explanation regarding what exactly
would constitute a nexus between an OATT violation and an entity's
market-based rates.\420\
---------------------------------------------------------------------------

    \420\ EPSA at 23-24.
---------------------------------------------------------------------------

    413. TDU Systems state that it is unclear what the nexus
requirement entails. They propose that if the transmission provider or
one of its affiliates has market-based rate authority, there should be
a rebuttable presumption that a violation of the OATT has the requisite
nexus to support revocation of the market-based rate authority of the
transmission provider and its affiliates.\421\ TDU Systems state that
it should be up to a seller to rebut that presumption.
---------------------------------------------------------------------------

    \421\ TDU Systems at 21-23.
---------------------------------------------------------------------------

    414. APPA/TAPS assert that the nexus standard adds an unnecessary
and counter-productive test.\422\ APPA/TAPS submit that if an OATT
violation denies, delays, or diminishes the availability of
transmission service or raises its costs, that alone should suffice for
consideration of revocation of market-based rate authority. They argue
that whether the violation had a nexus to the seller's market-based
rate sales may be irrelevant. APPA/TAPS state that a nexus requirement
could divert the Commission and injured parties through needless
disputes about whether the alleged violator used the OATT violation to
enable a specific sale under its market-based rate tariff authority,
ignoring the larger picture painted by the transmission provider's
anticompetitive conduct and exercise of transmission market power.
Thus, instead of the ``nexus'' standard, APPA/TAPS states that the
Commission should require that the OATT violation be ``material,''
i.e., one that denies customers the just, reasonable and non-
discriminatory and comparable transmission service that is essential to
mitigation of transmission market power.\423\
---------------------------------------------------------------------------

    \422\ APPA/TAPS at 81-82.
    \423\ Id. at 82.
---------------------------------------------------------------------------

    415. Reliant suggests that the Commission should strengthen its
vertical market power analysis by looking at the extent to which a
transmission provider has denied transmission access to competing
suppliers and should seek justification for such denials.\424\ For
those transmission providers seeking market-based rate authority,
Reliant asserts that any suppliers unable to reach a customer as a
result of an inappropriate denial should not be included as competing
generation in the transmission provider's horizontal market power
screens until the transmission provider remedies the problem.\425\
---------------------------------------------------------------------------

    \424\ See Reliant at 8-9.
    \425\ See id.
---------------------------------------------------------------------------

    416. Duke urges the Commission to clarify that a seller's market-
based rate authority should not be subject to limitation or revocation
if it participates in an RTO that is the subject of an OATT violation.
According to Duke, once the transmission owner transfers control over
its facilities to an RTO, adherence to the OATT is in the control of
the RTO, not the transmission owner.\426\
---------------------------------------------------------------------------

    \426\ Duke at 29-32.
---------------------------------------------------------------------------

Commission Determination
    417. We will adopt the NOPR proposal to revoke an entity's market-
based rate authority in response to an OATT violation only upon a
finding of a nexus between the specific facts relating to the OATT
violation and the entity's market-based rate authority, and reiterate
our statement in the NOPR that an OATT violation may subject the seller
to other remedies the Commission may deem appropriate, such as
disgorgement of profits or civil penalties.\427\ As stated in the NOPR,
the finding that an OATT adequately mitigates transmission market power
rests on the assumption that individual entities comply with the OATT
and there may be OATT violations in circumstances that, after applying
the factors in the Enforcement Policy Statement,\428\ merit revocation
or limitation of market-based rate authority. We find, however, that it
is inappropriate to revoke a seller's market-based rate authority for
an OATT violation unless there is a nexus between the specific facts
relating to the OATT violation and the seller's market-based rate
authority. This will ensure that our actions are not arbitrary or
capricious and that they are based on an adequate factual record. We
will not, as TDU Systems suggest, adopt a rebuttable presumption that
any OATT violation has the requisite nexus to support revocation of
market-based rate authority. There is a wide range of types of OATT
violations, including ones that may be inadvertent and ones that are
neither intended to affect, nor in fact affect, the market-based rate
sales of the transmission provider or its affiliates. We therefore
believe adoption of a general rebuttable presumption of a nexus for any
and all OATT violations is not justified.
---------------------------------------------------------------------------

    \427\ NOPR at P 91 (citing The Washington Water Power Company,
83 FERC ] 61,282 (1998)).
    \428\ Enforcement of Statutes, Orders, Rules and Regulations,
Policy Statement on Enforcement, 113 FERC ] 61,068 (2005)
(Enforcement Policy Statement).
---------------------------------------------------------------------------

    418. Several commenters sought clarification regarding what would
constitute a sufficient nexus between the specific facts relating to
the OATT violation and the seller's market-based rate authority.
Determining what

constitutes a sufficient factual nexus is best left to a case-by-case
consideration. The wide range of positions among commenters on how to
define a sufficient factual nexus itself suggests that this finding is
best made after review of a specific factual situation. Some commenters
assert that a finding of a ``material'' violation of the OATT would be
sufficient. We disagree. While a seller's inconsequential OATT
violation would not serve as a basis for revoking that entity's market-
based rate authority, our view is that revocation is warranted only
when an OATT violation has occurred and the violation had a nexus to
the market-based rate authority of the violator or its affiliates.
    419. The Commission emphasizes that we have discretion to fashion
remedies for OATT violations that relate to the violator's market-based
rate authority in instances in which we do not find sufficient
justification for revocation of that authority. For example, in
appropriate circumstances, we may modify or add additional conditions
to the violator's market-based rate authority or impose other
requirements to help ensure that the violator does not commit future,
similar misconduct. We also will consider whether to impose sanctions
such as assessment of civil penalties for particularly serious OATT
violations in addition to revocation of the violator's market-based
rate authority.
    420. We agree with Duke that a seller's market-based rate authority
should not be subject to limitation or revocation if it participates in
an RTO that is the subject of an OATT violation committed by the RTO.
We note, however, that if the seller itself is involved in an OATT
violation, the Commission will investigate the seller's actions where
appropriate, and may revoke market-based rate authority even though the
seller is in an RTO.
    421. With regard to Reliant's suggestion that the Commission should
examine the extent to which a transmission provider has denied
transmission access to competing suppliers as part of its vertical
market power analysis, we will allow intervenors on a case-by-case
basis to file evidence if they believe they have been denied
transmission access in violation of the OATT. Depending on specific
facts, such denials could constitute an OATT violation and could
warrant remedies such as a reduction of competing supplies for purposes
of the horizontal analysis.
c. Revocation of Affiliates' MBR Authority
Comments
    422. Some commenters oppose the proposal to revoke the market-based
rate authority of all affiliates of a transmission provider within a
particular market, regardless of whether they were involved in the
transmission provider's violation of its OATT. These commenters argue
that the proposal to revoke all affiliates' market-based rate authority
ignores the principles of the Commission's code of conduct and
standards of conduct, including provisions restricting the sharing of
market information and requiring separation of functions.\429\ They
argue that, in light of the separation of a company's marketing
function and transmission function under the standards of conduct, a
company's market-based rates should not be revoked because of an OATT
violation by an affiliated transmission owner unless there has also
been a violation of the standards of conduct, and there is a nexus
between the standards of conduct violation and the OATT non-
compliance.\430\ They assert that, unless there is a violation of the
standards of conduct, merchants will have no involvement in the actions
of transmission providers.\431\
---------------------------------------------------------------------------

    \429\ See Ameren at 8-11; PNM/Tucson at 10-12; EEI reply
comments at 33-35; Avista at 12-13; EEI at 54; Indianapolis P&L at
6-7.
    \430\ See PG&E at 3, 12-14; Xcel at 2 and 16.
    \431\ PG&E at 13.
---------------------------------------------------------------------------

    423. Xcel submits that, before imposing a penalty that would
effectively penalize the merchant function, the Commission should
require a demonstration that a utility's transmission function violated
the OATT so as to knowingly benefit the activities of its merchant
function.\432\ Xcel and Allegheny Energy state that the Commission
should not penalize the merchant side of an entity when the OATT
violation by the transmission provider causes no harm, was not the
result of deliberate manipulative conduct, was not part of a pattern of
misconduct, or did not involve senior management of the transmission
provider.\433\ Similarly, Indianapolis P&L advocates punishment of a
marketing or generation-only affiliate only to the extent such
affiliate colludes or conspires with such OATT mis-administration or if
such an affiliate financially benefits from such an act.\434\
---------------------------------------------------------------------------

    \432\ Xcel at 16-17. See also Avista at 12-13; PNM/Tucson at 10-
12.
    \433\ Allegheny Energy at 9-10; Xcel at 16-17.
    \434\ Indianapolis P&L at 6-7.
---------------------------------------------------------------------------

Commission Determination
    424. In response to concerns raised by commenters, we do not adopt
the proposal from the NOPR to revoke the market-based rate authority of
each affiliate of a transmission provider that loses its market-based
rate authority within a particular market as a result of the
transmission provider's OATT violation. Rather, we will create 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. We will allow an affiliate
of a transmission provider to retain its market-based rate authority in
a market area if the affiliate overcomes the rebuttable presumption
with respect to that market area.
    425. This issue generally will arise when a transmission provider
merits revocation of its market-based rate authority as a result of an
OATT violation. We have long held that the existence of an OATT is
deemed to mitigate vertical market power by a transmission provider and
its affiliates in a particular market. An OATT violation by a
transmission provider that merits revocation of the transmission
provider's market-based rate authority in a particular market will, at
a minimum, raise the question whether the transmission provider's
affiliates continue to qualify for market-based rates in that market
under the standards that we have established.\435\

As a result, we believe that it is appropriate to establish a
rebuttable presumption that if we find that a transmission provider
should lose its market-based rate authority in a particular market, all
affiliates of the transmission provider should also lose their market-
based rate authority in the same market.
---------------------------------------------------------------------------

    \435\ We observe that specific situations in which transmission
providers have agreed to resolve staff allegations that they engaged
in OATT violations have involved transactions with affiliates. See
Idaho Power Company, et al., 103 FERC ] 61,182 (2003) (settlement
of, among other issues, a practice whereby a transmission provider
permitted its merchant function to request non-firm transmission to
enable the merchant function to make off-system sales that by
definition were not used to serve native load, so that the
transmission did not qualify for the ``native load'' priority
specified in section 28.4 of the transmission provider's OATT);
Cleco Corporation, et al., 104 FERC ]61,125 (2003) (settlement
between Enforcement staff and a transmission provider (and others in
the corporate family) that provided a unique type of transmission
service for its affiliate that was neither made available to non-
affiliates nor included in its FERC tariff); Tucson Electric Power
Company, 109 FERC ] 61,272 (2004) (operational audit in which staff
found that, among other matters, a transmission provider permitted
its wholesale merchant function to purchase hourly non-firm and
monthly firm point-to-point transmission service using an off-OASIS
scheduling procedure while the transmission provider did not post on
its OASIS the availability of capacity on these paths); South
Carolina Electric & Gas Company, et al., 111 FERC ] 61,217 (2005)
(settlement of Enforcement staff allegation that a transmission
provider made available firm point-to-point transmission service to
its affiliated merchant function that did not submit transmission
schedules with specific receipt points for the service as required
by section 13.8 of the transmission provider's OATT); and
MidAmerican Energy Company, 112 FERC ] 61,346 (2005) (operational
audit in which staff found, among other things, that a transmission
provider permitted its wholesale merchant function to (a) Use
network transmission service to bring short-term energy purchases
onto its system while it simultaneously made off-system sales,
inconsistently with the preamble to Part III of the transmission
provider's OATT and section 28.6 of its OATT; and (b) confirm firm
network transmission service requests without identifying a
designated network resource or acquiring an associated network
resource, in some instances using this service to deliver short-term
energy purchases used to facilitate off-system sales, inconsistent
with section 29.2 or section 30.6 of the transmission provider's
OATT).
---------------------------------------------------------------------------

    426. We are mindful, however, that the circumstances of a
particular affiliate may not always justify the imposition of a remedy
so severe as revocation of market-based rate authority in a particular
market when its affiliated transmission provider loses its market-based
rate authority in that market as a result of an OATT violation. To
ensure that a determination to revoke market-based rate authority in a
particular market for a transmission provider and all of its affiliates
that possess such authority is adequately based upon record evidence,
we will allow an opportunity for each such affiliate to make a showing
that it should retain its market-based rate authority or that
enforcement action against it should be less severe than revocation.
The determination whether an affiliate has overcome the rebuttable
presumption depends on an analysis of specific facts in the record.
Relevant facts would include, for example, whether (1) The affiliate
knew of, participated in, or was an accomplice to the OATT violation,
(2) the affiliate assisted the transmission provider in exercising
market power, or (3) the affiliate benefited from the violation.
    427. Consistent with our approach to revocation of a transmission
provider's market-based rates, the Commission clarifies that a decision
to revoke the market-based rate authority of the transmission
provider's affiliates in the affected market will also be based on a
finding that the transmission provider's violation of its OATT has a
nexus to the market-based rate authority of those affiliates.
2. Other Barriers to Entry
Commission Proposal
    428. The Commission proposed in the NOPR that, in order for a
seller to demonstrate that it satisfies the Commission's vertical
market power concerns, it must demonstrate that neither it nor its
affiliates can erect other barriers to entry (i.e., barriers other than
transmission). In this regard, the Commission proposed to continue to
require a seller to provide a description of its affiliation, ownership
or control of inputs to electric power production (e.g., fuel supplies
within the relevant control area); ownership or control of gas storage
or intrastate transportation or distribution of inputs to electric
power production; and ownership or control of sites for new generation
capacity development. The Commission also proposed to require sellers
to make an affirmative statement that they have not erected barriers to
entry into the relevant market and that they cannot do so.
    429. In addition, the Commission proposed to provide additional
regulatory certainty by clarifying which inputs to electric power
production the Commission will consider as other barriers to entry in
its vertical market power review, and sought comments on this proposal.
Specifically, the Commission proposed that the analysis continue to
include the consideration of ownership or control of sites for
development of generation in the relevant market, fuel inputs such as
coal facilities in the relevant market, and the transportation, storage
or distribution of inputs to electric power production such as
intrastate gas storage and distribution systems, and rail cars/barges
for the transportation of coal.
    430. The Commission also clarified that sellers need not address
interstate transportation of natural gas supplies because such
transportation is regulated by this Commission.\436\ The Commission
explained that its open access regulations adequately prevent sellers
from withholding interstate pipeline capacity. In addition, interstate
pipeline capacity held by firm shippers that is not utilized or
released is available from the pipeline on an interruptible basis. As
to the commodity, the Commission noted that Congress has found the
natural gas market competitive.\437\
---------------------------------------------------------------------------

    \436\ NOPR at P 93 (citing Pipeline Service Obligations and
Revisions to Regulations Governing Self-Implementing Transportation
Under Part 284 of the Commission's Regulations, Order No. 636, 57 FR
13267 (Apr. 16, 1992), FERC Stats. & Regs. Regulations Preambles
January 1991-June 1996 ] 30,939 (Apr. 8, 1992)).
    \437\ NOPR at P 93 (citing Natural Gas Wellhead Decontrol Act of
1989, Pub. L. 101-60, 103 Stat. 157 (1989); Natural Gas Policy Act
of 1978, section 601(a)(1), 15 U.S.C. 3431 (deregulating the
wellhead price of natural gas)).
---------------------------------------------------------------------------

    431. The Commission also sought comment on whether ownership or
control of other inputs to electric power production should be
considered as potential barriers to entry and, if so, what criteria the
Commission should use to evaluate evidence that is presented.
Comments
    432. Several commenters state that the Commission's other barriers
to entry criteria are long-standing, well established and thus no
expansion of current policy is necessary.\438\ They submit that the
requirement that the analysis include the consideration of ownership or
control of sites for development of generation in the relevant market,
fuel inputs such as coal supplies in the relevant market, and the
transportation, storage or distribution of inputs to electric power
production such as intrastate gas storage and distribution systems, and
rail cars/barges for the transportation of coal, is broad and provides
sufficient information for the Commission to assess the seller's
potential to erect barriers to entry. They assert that this
information, coupled with the proposal to require sellers to make an
affirmative statement that they have not erected barriers to entry into
the relevant market and that they cannot do so, provides the Commission
with appropriate information.\439\
---------------------------------------------------------------------------

    \438\ Allegheny Energy at 9-10; Southern at 38-40; EEI at 44-45.
    \439\ See, e.g., New Jersey Board at 3.
---------------------------------------------------------------------------

    433. APPA/TAPS suggest that the proposed entry barriers affirmation
should be signed and affirmed by a senior corporate official.\440\
However, APPA/TAPS state that the Commission should not codify the
specific entry barriers that it will consider given the ever-changing
nature of electricity markets.\441\ They submit that while
illustrations of entry barriers can provide guidance to sellers and
market participants, the Commission should not limit the kinds of entry
barriers it will consider.
---------------------------------------------------------------------------

    \440\ APPA/TAPS at 6, 85.
    \441\ APPA/TAPS at 6, 84-85.
---------------------------------------------------------------------------

    434. Sempra states that, to the extent the new analytic framework
(the consolidation of the former transmission market power and other
barriers to entry factors into the vertical market power analysis)
would recognize existing

precedent and not work to place additional burdens on market-based rate
sellers, Sempra would support it.\442\
---------------------------------------------------------------------------

    \442\ Sempra at 6-7.
---------------------------------------------------------------------------

    435. Several sellers support continuation of the Commission's
policy that sellers need not address natural gas and its interstate
transportation as part of their vertical market power analysis.\443\ In
contrast, a commenter states that the Commission should not make a
blanket exemption for sellers or their affiliates who own or control
natural gas pipeline capacity. Notwithstanding the Commission's
statement that natural gas interstate pipelines are regulated by the
Commission and that the regulations adequately prevent sellers from
withholding capacity, this commenter argues that the natural gas open
access rules do not adequately mitigate vertical market power in all
situations. It encourages the Commission to require sellers with
significant firm interstate pipeline capacity rights to demonstrate
that they do not have vertical market power.\444\
---------------------------------------------------------------------------

    \443\ See Constellation at 25; Duke at 30; PG&E at 13; Sempra at
6.
    \444\ Drs. Broehm and Fox-Penner at 14-15.
---------------------------------------------------------------------------

    436. APPA/TAPS state that the Commission should clarify that it
will consider control over interstate natural gas transportation if the
issue is raised in a market-based rate proceeding.\445\ APPA/TAPS state
that even if sellers do not have to address interstate gas
transportation as part of the vertical market power test, intervenors
should not be precluded from raising concerns and introducing evidence
regarding a seller's position in the interstate natural gas
transportation market as a potential entry barrier and APPA/TAPS seek
clarification in this regard.\446\
---------------------------------------------------------------------------

    \445\ APPA/TAPS at 82-85.
    \446\ APPA/TAPS at 6.
---------------------------------------------------------------------------

    437. Several commenters state that the markets for the other inputs
to generation factor (e.g., fuel supply other than natural gas,
transportation and storage) are workably competitive and provide few
opportunities for a seller to raise entry barriers. They therefore
suggest that the Commission create a rebuttable presumption that the
markets for other factor inputs such as coal, oil and distillate
commodity markets, the transportation and storage of these fuels, sites
for new plants, etc., are workably competitive. They urge that, absent
a showing to the contrary, ownership or control of such assets need not
be analyzed.\447\ In this regard, Duke states that the Commission
should allow sellers to make the representation that they cannot erect
such barriers, while allowing other parties to introduce evidence
challenging such an assertion.\448\
---------------------------------------------------------------------------

    \447\ See, e.g., Duke at 30-32; Constellation at 23-27.
    \448\ Duke at 30-32.
---------------------------------------------------------------------------

    438. PG&E states that, similar to the rules for interstate
transportation of natural gas supplies (under which Commission open
access regulations adequately prevent sellers from withholding
interstate gas pipeline capacity), State regulation of access to gas
storage, natural gas pipelines, or natural gas distribution should be a
basis for finding that an entity with ownership or control of such
assets cannot erect barriers to entry or otherwise hold or exercise
vertical market power in the generation market.\449\
---------------------------------------------------------------------------

    \449\ See PG&E at 3, 13-14.
---------------------------------------------------------------------------

    439. SoCal Edison urges the Commission to clarify that, with regard
to sites for building generation, mere ownership of real estate does
not reasonably support an inference of a barrier to entry, and that
sellers are not required, in the first instance, to make any
affirmative demonstration of the absence of potential that their real
estate holdings might constitute a theoretical barrier to entry.
Rather, the Commission should clarify that it would pursue such inquiry
only to the extent colorable issues are raised by way of protest or
intervention.\450\ Sempra states the Commission should modify the
regulatory text in three respects. First, the Commission should
explicitly exclude from the definition of ``inputs to electric power
production'' in proposed Sec.  35.36(a)(4) interstate transportation of
natural gas supplies (both ownership/control of facilities as well as
ownership/control of capacity) and the gas commodity itself. Second,
the Commission should also exclude from the definition of ``inputs to
electric power production'' intrastate natural gas facilities or
distribution facilities, particularly where such facilities are
operated under pervasive State regulations and in accordance with open
access principles. Third, the Commission should make clear in this
provision and at Sec.  35.27(e) of its proposed regulations (pertaining
to a seller's vertical market power analysis), that the only ``inputs''
that need to be addressed are those present in the seller's relevant
geographic market(s).\451\
---------------------------------------------------------------------------

    \450\ SoCal Edison at 2, 19.
    \451\ Sempra at 6.
---------------------------------------------------------------------------

Commission Determination
    440. As discussed above, the Commission will adopt the NOPR
proposal to consider a seller's ability to erect other barriers to
entry as part of the vertical market power analysis, but we will modify
the requirements when addressing other barriers to entry. We also
provide clarification below 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) and we modify the proposed regulatory text in
that regard.
    441. In this rule, the Commission draws a distinction between two
categories of inputs to electric power production: One consisting of
natural gas supply, interstate natural gas transportation (which
includes interstate natural gas storage), oil supply, and oil
transportation, and another consisting of 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.
    442. With regard to the first category, based upon the comments
received and further consideration, the Commission will not require a
description or affirmative statement with regard to ownership or
control of, or affiliation with an entity that owns or controls,
natural gas and oil supply, including interstate natural gas
transportation and oil transportation.
    443. In the case of natural gas, prices for wellhead sales were
decontrolled by Congress.\452\ Further, the Commission has granted
other sellers blanket authority to make sales at market rates. In the
case of transportation of natural gas, pipelines operate pursuant to
the open and non-discriminatory requirements of Part 284 of the
Commission's regulations.\453\ These regulations mandate that all
available pipeline capacity be posted on the pipelines' Web site, and
that available capacity cannot be withheld from a

shipper willing to pay the maximum approved tariff rate.
---------------------------------------------------------------------------

    \452\ INGAA v. FERC, 285 F.3d 18 (D.C. Cir. 2002); Natural Gas
Decontrol Act of 1989, H.R. Rep. No. 101-29, 101st Cong., 1st Sess.,
at 6 (1989).
    \453\ See, e.g., Pipeline Service Obligations and Revisions to
Regulations Governing Self-Implementing Transportation Under Part
284 of the Commission's Regulations, Order No. 636, 57 FR 13267
(Apr. 16, 1992), FERC Stats. & Regs. Regulations Preambles January
1991-June 1996 ] 30,939 (Apr. 8, 1992); Regulation of Short-Term
Natural Gas Transportation Services and Regulation of Interstate
Natural Gas Transportation Services, Order No. 637, FERC Stats. &
Regs. Regulations Preambles July 1996-December 2000 ] 31,091 (Feb.
9, 2000); order on reh'g, Order No. 637-A, FERC Stats. & Regs.
Regulations Preambles July 1996-December 2000) ] 31,099 (May 19,
2000); reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000); aff'd
in part and denied in part.
---------------------------------------------------------------------------

    444. Similarly, we note that oil pipelines are common carriers
under the Interstate Commerce Act, specifically under section 1(4), and
are required to provide transportation service ``upon reasonable
request therefore'' \454\ and that Congress has not chosen to regulate
sales of oil.
---------------------------------------------------------------------------

    \454\ 49 App. U.S.C. 1(4).
---------------------------------------------------------------------------

    445. In response to APPA/TAPS' request for clarification, we note
that as an initial matter, to the extent intervenors are concerned
about a seller's market power from ownership or control of interstate
natural gas transportation, this would be actionable first in a
complaint proceeding under section 5 of the Natural Gas Act before
turning to market-based rate consequences.
    446. With regard to the second category, in light of the comments
received, and upon further consideration, the Commission adopts a
rebuttable presumption that sellers cannot erect barriers to entry with
regard to the ownership or control of, or affiliation with any 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.\455\ To
date, the Commission has not found such ownership, control or
affiliation to be a potential barrier to entry warranting further
analysis in the context of market-based rate proceedings. However,
unlike the first category of inputs, the Commission does not have
sufficient evidence to remove these inputs from the analysis entirely.
Accordingly, we will rebuttably presume 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 will
allow intervenors to demonstrate otherwise. We note that this
rebuttable presumption only applies if the seller describes and attests
to these inputs to electric power production, as described herein.
---------------------------------------------------------------------------

    \455\ We modify the definition of ``inputs to electric power
production'' in 18 CFR 35.36(a)(4) to reflect this clarification.
---------------------------------------------------------------------------

    447. With regard to this second category of inputs to electric
power production, we will require 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, 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, with some
modifications to the affirmative statement from what was proposed in
the NOPR. Instead of requiring sellers to make an affirmative statement
that they have not erected barriers to entry into the relevant market,
we will require sellers 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. We clarify 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.
    448. We therefore modify the proposed regulations to require 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; sources of coal
supplies and the transportation of coal supplies such as barges and
rail cars, to ensure that this information is included in the record of
each market-based rate proceeding. In addition, a seller is required to
make an affirmative statement that it has not erected barriers to entry
into the relevant market and will not erect barriers to entry into the
relevant market.
    449. While some commenters raise concerns that codification of
these possible barriers may inappropriately limit the analysis of a
seller's potential to erect other barriers to entry, we clarify that we
are codifying what showing a seller must make in order to receive
authority to make sales of electric power at market-based rates. By so
doing, we are not preventing intervenors from raising other barriers to
entry concerns for consideration on a case-by-case basis. This approach
will allow unique or newly developed barriers to entry to be brought
before the Commission.
    450. We will not adopt APPA/TAPS' proposal that the affirmation be
signed and affirmed by a senior corporate officer. Section 35.37(b) of
the Commission's regulations requires sellers to ``provide accurate and
factual information and not submit false or misleading information, or
omit material information, in any communication with the Commission * *
*''. \456\ The Commission has ample authority to enforce its
regulations, and therefore does not believe that it is necessary in
these circumstances to require the affirmative statement to be signed
by a senior corporate official.
---------------------------------------------------------------------------

    \456\ 18 CFR 35.41(b) (formerly 18 CFR 35.37(b)).
---------------------------------------------------------------------------

    451. The changes made to the evaluation of other barriers to entry,
as described above, should not be more burdensome on market-based rate
sellers than that which is currently in place. For the most part, the
Commission is maintaining its current policy, with some variation and
additional guidance on what is required. The policy adopted in this
Final Rule should provide sellers with additional clarity regarding
what needs to be addressed as a potential other barrier to entry and
the way in which to address it.
3. Barriers Erected or Controlled by Other Than The Seller
Comments
    452. APPA/TAPS state that entry conditions and barriers, regardless
of origin, need to be considered in both the horizontal and vertical
market power tests.\457\ APPA/TAPS state that the Commission should not
focus solely on entry barriers erected by the seller itself and that
the Commission must be receptive to claims that entry barriers in the
seller's market provide or enhance market power, even if the seller
itself did not erect the barriers.\458\ Another commenter states that
the Commission should maintain a separate evaluation on other barriers
to entry that are not caused by a seller, thus requiring a seller to
address barrier to entry issues to the relevant market, even if those
barriers are not caused by a seller or its affiliates.
---------------------------------------------------------------------------

    \457\ APPA/TAPS at 6.
    \458\ APPA/TAPS at 82-84.
---------------------------------------------------------------------------

Commission Determination
    453. The Commission finds that it is not reasonable to routinely
require sellers to make a showing regarding potential barriers to entry
that others might erect and that are beyond the seller's control.
However, we will allow intervenors to present evidence in this regard,
and by this means we will be able to assess the existence of barriers
to entry beyond the seller's control but which may affect the seller's
ability to exercise market power. Should a potential barrier in the
relevant market

be raised by an intervenor, the Commission will address such claims on
a case-by-case basis.
4. Planning and Expansion Efforts
    454. In the NOPR, the Commission noted that several commenters had
suggested that a transmission planning and expansion process can
ameliorate vertical market power, and, accordingly, the Commission was
seeking comment on the issues of transmission planning and expansion in
the notice of proposed rulemaking in the OATT Reform Rulemaking. The
Commission sought comment in the NOPR on whether the planning and
expansion efforts in the OATT Reform Rulemaking would address
commenters' concerns here.
Comments
    455. APPA/TAPS state that there will be a continuing need to
address transmission market power issues, even after adoption of a
revised pro forma OATT, because the improvements in transmission
planning and expansion will not be immediately felt.\459\ EPSA states
that it advocates robust, independent and mandatory regional planning
as a means to combat vertical market power and ensure competitive
markets.\460\
---------------------------------------------------------------------------

    \459\ APPA/TAPS at 80-85.
    \460\ EPSA at 27.
---------------------------------------------------------------------------

    456. TDU Systems recommend that the Commission revoke a
transmission provider's market-based rate authority if it fails to
build transmission to accommodate the needs of its transmission
customers demonstrated through an open, joint planning process.\461\
TDU Systems submit that willful failure to plan, maintain and expand
the transmission system to meet transmission customers' needs is an
abuse of vertical market power and creates structural barriers to
competition.
---------------------------------------------------------------------------

    \461\ TDU Systems at 21-23.
---------------------------------------------------------------------------

    457. ELCON states that while it is encouraged by proposals in the
OATT Reform Rulemaking, it recommends that transmission market power be
the subject of a new rulemaking.\462\ Similarly, EPSA asserts that a
technical conference to develop the barriers to entry portion of the
screens would help ensure an open, accessible, and robust competitive
market.\463\
---------------------------------------------------------------------------

    \462\ ELCON at 5-6.
    \463\ EPSA at 28.
---------------------------------------------------------------------------

Commission Determination
    458. We find that our reforms to the pro forma OATT to require
coordinated transmission planning on a local and regional level address
the concerns raised by commenters. While we recognize that the
transmission planning reforms in Order No. 890 are still in the process
of being implemented, failure to plan, maintain and expand the
transmission system in accordance with the applicable, Commission-
approved OATT has always been, and will continue to be, an OATT
violation. Order No. 890 provides for revocation of an entity's, and
possibly that of its affiliates, market-based rate authority in
response to an OATT violation upon a finding of a specific factual
nexus between the violation and the entity's market-based rate
authority.\464\ Should such a violation occur, the Commission will
address it in that context. The Commission does not find that the need
exists to convene a technical conference in this regard. The OATT
Reform Rulemaking dealt extensively with this issue and the Commission
finds that it has been adequately addressed in Order No. 890.
---------------------------------------------------------------------------

    \464\ Order No. 890, FERC Stats. & Regs. ] 31,241 at P 1743,
1747.
---------------------------------------------------------------------------

5. Monopsony Power
    459. In the NOPR, the Commission sought comment on whether the
exercise of buyer's market power by the transmission provider should be
considered a potential barrier to entry and, if so, what criteria the
Commission should use to evaluate evidence that is presented.
Comments
    460. Allegheny states that the NOPR provided no explanation for why
a transmission provider's buyer's market power should be relevant to
the analysis.\465\ EEI argues that the Commission should not consider
buyer's market power as a barrier to entry because it is not relevant
to the analysis. According to EEI, the market-based rate analysis
considers the ability of the applicant to exercise market power as a
seller, not a buyer, which is consistent with the Commission's
authority under section 205 of the FPA, which regulates the sale of
electricity. EEI asserts that states generally have jurisdiction over
the purchase of electricity by franchised utilities.\466\
---------------------------------------------------------------------------

    \465\ Allegheny Energy at 10.
    \466\ EEI at 43.
---------------------------------------------------------------------------

    461. EPSA argues that if a utility holds a dominant purchasing
position in the wholesale marketplace that allows it to exert excessive
and discretionary buying power (of both supply and supply generation
facilities), the exercise of market power will then lie with the buyer,
not the seller. This problem is exacerbated when such a purchasing
utility also owns, controls or dispatches its own proprietary supply
and the relevant transmission system.
    462. EPSA states that some would argue that the Commission cannot
order economic dispatch or competitive solicitation because the FPA
grants the Commission jurisdiction over sales, not purchases. However,
EPSA submits that the Commission would not be mandating purchases, but
eliminating the exercise of market power which directly raises the
prices for wholesale sales. In so doing, the Commission would be using
its tools under sections 205 and 206 of the FPA to ensure just and
reasonable wholesale rates by allowing competitive alternatives to
enter the market and protecting consumers from practices that will
result in excessive rates and charges. EPSA argues that the Commission
must develop a transparent, methodical process for assessing this
segment of the vertical market power analysis. EPSA submits that load
serving entities that are transmission providers must, in addition to
providing enhanced transmission services, facilitate accessible long-
term markets through all-source competitive procurement processes,
preferably via state created and supervised means, with independent
third party oversight. It asserts that the Commission must achieve and
ensure these goals through a transparent, well-developed process. EPSA
requests that the Commission convene a technical conference in order to
fully develop that process and ensure that barriers to entry are
properly mitigated.\467\
---------------------------------------------------------------------------

    \467\ EPSA at 26-27.
---------------------------------------------------------------------------

Commission Determination
    463. EPSA's proposal not only raises jurisdictional issues, but
EPSA has failed to provide specific instances in which the exercise of
monopsony power has taken place and has provided no guidance as to how
buyer market power should be measured (even assuming the Commission has
jurisdiction to address it). The Commission does not believe it is
appropriate to attempt to address these difficult issues without
specific evidence of monopsony power and a clear delineation of the
State-Federal jurisdiction issues that would arise in the context of a
specific seller and specific set of circumstances. For the same reason,
we will not grant EPSA's request to convene a technical conference to
address such issues generically. Until EPSA or others provide such
information concerning a particular seller in either a market-based

rate proceeding or a complaint, we defer judgment on the many difficult
issues raised by EPSA.

C. Affiliate Abuse

1. General Affiliate Terms and Conditions
a. Codifying Affiliate Restrictions in Commission Regulations
Commission Proposal
    464. In the NOPR the Commission proposed to discontinue referring
to affiliate abuse as a separate ``prong'' of the market-based rate
analysis and instead proposed to codify in the regulations at 18 CFR
part 35, subpart H, an explicit requirement that any seller with
market-based rate authority must comply with the affiliate power sales
restrictions and other affiliate restrictions. The Commission proposed
to address affiliate abuse by requiring that the conditions set forth
in the proposed regulations be satisfied on an ongoing basis as a
condition of obtaining and retaining market-based rate authority. The
Commission indicated that a seller seeking to obtain or retain market-
based rate authority will be obligated to provide a detailed
description of its corporate structure so that the Commission can be
assured that the Commission's requirements are being applied correctly.
In particular, the Commission proposed that sellers with franchised
service territories be required to make a showing regarding whether
they serve captive customers and to identify all ``non-regulated''
power sales affiliates, such as affiliated marketers and
generators.\468\
---------------------------------------------------------------------------

    \468\ In the NOPR, the Commission proposed to use the term
``non-regulated power sales affiliate.'' As discussed below, this
Final Rule uses the term ``market-regulated power sales affiliate''
instead. ``Market-regulated'' power sales affiliates, for purposes
of this rule, refers to sellers that sell at market-based rates
rather than cost-based rates. If such sellers are public utilities,
technically, they are not unregulated since they must receive
market-based rate authority from the Commission and are subject to
ongoing oversight by the Commission. See discussion infra.
---------------------------------------------------------------------------

    465. The Commission further proposed that, as a condition of
receiving market-based rate authority, sellers must adopt the MBR
tariff (included as Appendix A to the NOPR) which includes a provision
requiring the seller to comply with, among other things, the affiliate
restrictions in the regulations. The Commission noted that failure to
satisfy the conditions set forth in the affiliate restrictions will
constitute a tariff violation. The Commission sought comment on these
proposals
Comments
    466. As a general matter, commenters support the Commission's
proposal to codify the affiliate restrictions in the Commission's
regulations.\469\ No comments were received opposing the proposal to
codify affiliate restrictions in the Commission's regulations.
---------------------------------------------------------------------------

    \469\ See generally APPA/TAPS at 7; 85-86.
---------------------------------------------------------------------------

Commission Determination
    467. The Commission will adopt the proposal in the NOPR to
discontinue considering affiliate abuse as a separate ``prong'' of the
market-based rate analysis and instead codify in the Commission's
regulations in Sec.  35.39 an explicit requirement that any seller with
market-based rate authority must comply with the affiliate
restrictions. This will address affiliate abuse by requiring that the
conditions set forth in the regulations be satisfied on an ongoing
basis as a condition of obtaining and retaining market-based rate
authority. Included in the regulations will be a provision expressly
prohibiting power sales between a franchised public utility with
captive customers and any market-regulated power sales affiliates
without first receiving Commission authorization for the transaction
under section 205 of the FPA. Also included in the regulations will be
the requirements that have previously been known as the market-based
rate ``code of conduct,'' as those requirements have been revised in
this Final Rule.
    468. Additionally, although we do not adopt the proposal to require
that, as a condition of receiving market-based rate authority, sellers
must adopt the MBR tariff (included as Appendix A to the NOPR), we do
adopt a set of standard tariff provisions that we will require each
seller to include in its market-based rate tariff, including a
provision requiring the seller to comply with, among other things, the
affiliate restrictions in the regulations. We further adopt the
proposal that failure to satisfy the conditions set forth in the
affiliate restrictions will constitute a tariff violation.
b. Definition of ``Captive Customers''
Commission Proposal
    469. The Commission stated in the NOPR that, among other things, in
the Commission's Final Rule on transactions subject to section 203 of
the FPA, the Commission defined the term ``captive customers'' to mean
``any wholesale or retail electric energy customers served under cost-
based regulation.''\470\ The Commission sought comment on whether the
same definition should be used for purposes of this rule.
---------------------------------------------------------------------------

    \470\ Transactions Subject to FPA section 203, Order No. 669-A,
71 FR 28422 (May 16, 2006), FERC Stats. & Regs. ] 31,214 (2006). See
also Repeal of the Public Utility Holding Company Act of 1935 and
Enactment of the Public Utility Holding Company Act of 2005, Order
No. 667-A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ] 31, 213
(2006).
---------------------------------------------------------------------------

Comments
    470. While a number of commenters support the Commission's proposal
to codify the affiliate abuse ``prong'' in the Commission's
regulations,\471\ they comment that the proposed affiliate abuse
restrictions do not do enough to protect retail customers from
affiliate abuse.\472\ NASUCA argues that affiliate abuse restrictions
should be applicable to any affiliate with any retail customers,
whether or not the retail affiliate is a ``franchised'' utility,
whether or not it has a State-imposed ``service obligation,'' and
whether or not its customers are characterized as ``captive.'' NASUCA
submits that the Commission should not rely on a State's adoption of a
retail access regime for any determination that a customer is not
captive. Further, although NASUCA comments that the Commission's
proposed definition for ``captive customers'' is an improvement from
the text of the proposed regulation (which contains no definition of
``captive customers''), NASUCA suggests it could also invite
distinctions turning on the meaning of ``cost-based regulation'' that
might cause future uncertainty in some circumstances and a
corresponding loss of customer protection.\473\
---------------------------------------------------------------------------

    \471\ New Jersey Board at 3.
    \472\ NASUCA at 20-30.
    \473\ NASUCA at 20-30.
---------------------------------------------------------------------------

    471. New Jersey Board argues that when customers lack realistic
alternatives to purchasing power from their local utility, regardless
of a legal right to competitive power suppliers, such customers are
still captive. New Jersey Board states that most customers in retail
choice states still rely on the provider-of-last-resort for electric
service and, thus, are still captive customers.\474\ New Jersey Board
comments that, due to the relatively young retail choice and
deregulation programs in many states, ``it would be premature to
declare electric retail choice to be vibrant enough to leave consumer
protection from affiliate abuses completely to the marketplace.'' \475\
New Jersey Board states that, even where there are a few

providers that comprise the market, such oligopolies often exhibit the
same lack of competition and high prices as are seen in a monopoly
market. Thus, affiliate abuse would remain a concern where utilities
would be granted market-based rate authority.\476\
---------------------------------------------------------------------------

    \474\ New Jersey Board reply comments at 3-4.
    \475\ Id. at 5.
    \476\ Id.
---------------------------------------------------------------------------

    472. AARP similarly comments that the proposed definition of
``captive customers'' fails to capture the potential for adverse
impacts on retail customers of ``default'' suppliers and thus, the
coverage of the Commission's affiliate restrictions should be expanded
to prevent customers from bearing the costs of non-regulated marketing
affiliates of the public utility they rely on for reliable
service.\477\
---------------------------------------------------------------------------

    \477\ AARP at 10-11.
---------------------------------------------------------------------------

    473. ELCON suggests that ``captive customers'' should be defined as
any end-users that do not have real competitive opportunities.\478\ It
recommends that the Commission adopt a case-specific approach to
identifying captive customers to account for the failure of retail
competition in many restructured states.
---------------------------------------------------------------------------

    \478\ ELCON at 2, 7-8.
---------------------------------------------------------------------------

    474. A number of other commenters argue that the proposed
definition of ``captive customers'' is too broad \479\ and would
improperly include customers with competitive alternatives. They state
that the Commission should clarify that ``captive customers'' does not
include customers in states with retail choice.\480\ Duke recommends
that the Commission define ``captive customer'' as ``any electric
energy customer that cannot choose an alternative energy supplier.''
\481\ Duke adds that initial commenters, such as ELCON, provide no
support for their assertion that state retail access programs do not
generate effective competition and that most provider-of-last-resort
customers are actually captive.
---------------------------------------------------------------------------

    \479\ Ameren at 11-14; Allegheny at 12-13; EEI at 44;
FirstEnergy at 13; Duke at 4, 32; and Duquesne at 4.
    \480\ Constellation argues that customers are not to be
considered ``captive'' and a seller is therefore not considered a
franchised public utility when a retail choice program is in place
for the public utility's retail customers. Constellation at 4.
    \481\ Duke at 32-36. Duke reply comments at 22-23.
---------------------------------------------------------------------------

    475. Ameren comments that while there are sellers with market-based
rate authority that have no captive wholesale customers for energy, but
do have a cost-based rate schedule for reactive power supply, the fact
that a seller has wholesale customers under a single cost-based rate
for reactive power should not render the entity a seller with ``captive
customers'' and therefore, subject to the affiliate restrictions.\482\
It states that such a seller would have no ability to transfer benefits
from its ``captive customers'' (customers taking reactive power
services at cost-based rates) to subsidize its unregulated market-based
rate sales, given the different products at issue and the restrictions
of the cost-based rates for reactive power.
---------------------------------------------------------------------------

    \482\ Ameren at 12.
---------------------------------------------------------------------------

    476. APPA/TAPS submit that the definition of ``captive customers''
should include wholesale transmission customers captive to the
transmission provider's system.\483\ APPA/TAPS state that affiliate
abuse not only raises costs to wholesale customers, it can also harm
competition such as through cross-subsidization that provides the
seller with an unfair competitive advantage. Therefore, APPA/TAPS state
that wholesale transmission customers captive to the transmission
provider's system are particularly vulnerable to this kind of
competitive harm and should be included in the definition of ``captive
customers'' in the regulations.\484\
---------------------------------------------------------------------------

    \483\ APPA/TAPS at 7, 86-87.
    \484\ Id. at 86-87.
---------------------------------------------------------------------------

    477. EEI responds to APPA/TAPS' comment by stating that it is
``completely unnecessary'' to include transmission dependent utilities
in the definition of captive customers since Order No. 888 already
provides sufficient protections for transmission customers.
Additionally, EEI replies that transmission dependent utilities are
like customers with retail choice who have chosen to stay under cost-
based rates while other transmission customers have broader options.
EEI responds that the Commission does not currently consider such
customers captive and there is no reason to change this policy.\485\
---------------------------------------------------------------------------

    \485\ EEI reply comments at 35-36.
---------------------------------------------------------------------------

Commission Determination
    478. The Commission adopts the NOPR proposal to define ``captive
customers'' as ``any wholesale or retail electric energy customers
served under cost-based regulation.''
    479. The Commission clarifies in response to several comments 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.
Retail customers who choose to be served under cost-based rates but
have the ability, by virtue of State law, to choose one retail supplier
over another, are not considered to be under ``cost-based regulation''
and therefore are not ``captive.''
    480. As the Commission has explained, retail customers in retail
choice states who choose to buy power from their local utility at cost-
based rates as part of that utility's provider-of-last-resort
obligation are not considered captive customers because, although they
may choose not to do so, they have the ability to take service from a
different supplier whose rates are set by the marketplace. In other
words, they are not served under cost-based regulation, since that term
indicates a regulatory regime in which retail choice is not
available.\486\ On the other hand, in a regulatory regime in which
retail customers have no ability to choose a supplier, they are
considered captive because they must purchase from the local utility
pursuant to cost-based rates set by a State or local regulatory
authority.\487\ Therefore, with this clarification, the Commission will
adopt the definition of ``captive customers'' proposed in the NOPR and
clarifies, that, as the Commission did in Order No. 669-A, we will
include the definition of captive customers in the regulations.
Regarding wholesale customers, sellers should continue to explain why,
if they have wholesale customers, those customers are not captive.
---------------------------------------------------------------------------

    \486\ Duquesne Light Holdings, Inc., 117 FERC ] 61,326 at P 38
(2006).
    \487\ Where a utility has captive retail customers, but
industrial customers have retail choice, we would consider that
utility to have captive customers because the retail residential
customers are captive.
---------------------------------------------------------------------------

    481. We note that it is not the role of this Commission to evaluate
the success or failure of a State's retail choice program including
whether sufficient choices are available for customers inclined to
choose a different supplier. In this regard, the states are best
equipped to make such a determination and, if necessary, modify or
otherwise revise their retail access programs as they deem appropriate.
Further, to the extent a retail customer in a retail choice state
elects to be served by its local utility under provider-of-last-resort
obligations, the State or local rate setting authority, in determining
just and reasonable cost-based retail rates, would in most
circumstances be able to review the prudence of affiliate purchased
power costs and disallow pass-through of costs incurred as a result of
an affiliate undue preference.
    482. We also decline to include transmission customers in the
definition of ``captive customers'' for purposes of market-based rates.
We agree with EEI that the Commission's open access

policies protect transmission customers from the exercise of vertical
market power. In this regard, we note that the Commission recently
issued Order No. 890, which revised the pro forma OATT to ensure that
it achieves its original purpose of remedying undue discrimination.
Order No. 890 provided greater clarity regarding the requirements of
the pro forma OATT and greater transparency in the rules applicable to
the planning and use of the transmission system, in order to reduce
opportunities for the exercise of undue discrimination, make undue
discrimination easier to detect, and facilitate the Commission's
enforcement of the tariff.
    483. In response to Ameren's comments that a seller with wholesale
customers under a single cost-based rate for reactive power should not
be considered a seller with ``captive customers'' subject to the
affiliate restrictions, we agree that such customers are not captive
for purposes of market-based rates. The concerns underlying the
affiliate restrictions do not apply to sales of reactive power because
those sales are typically either made to transmission providers so that
the transmission provider can satisfy its obligation to provide
reactive power or made by the transmission provider under its
applicable OATT.
c. Definition of ``Non-Regulated Power Sales Affiliate''
Commission Proposal
    484. Proposed Sec.  35.36(a)(6) defined ``non-regulated power sales
affiliate'' as ``any non-traditional power seller affiliate, including
a power marketer, exempt wholesale generator, qualifying facility or
other power seller affiliate, whose power sales are not regulated on a
cost basis under the FPA.''
Comments
    485. A number of commenters seek clarification and modification of
the Commission's proposed definition of ``non-regulated power sales
affiliate.''
    486. Southern requests clarification that a franchised public
utility does not become a non-regulated power sales affiliate simply
because it may make some wholesale sales under market-based rate
authority.
    487. SoCal Edison argues that the Commission offers no explanation
for including Qualifying Facilities (QFs) in the definition of ``non-
regulated power sales affiliate.'' It states that the proposed
definition of non-regulated power sales affiliate would subject QFs
that may not have market-based rate authority to the code of conduct.
It states that the NOPR proposal would constitute a departure from
traditional PURPA implementation and from the Commission's recently
revised regulations reaffirming that QF contracts created pursuant to a
statutory regulatory authority's implementation of PURPA are exempt
from review under sections 205 and 206 of the FPA.\488\ PG&E asserts
that the Commission should clarify the meaning of ``non-regulated power
sales affiliate'' so that it does not encompass all affiliates such as
parent companies or the natural gas LDC function of the regulated,
franchised utility.\489\
---------------------------------------------------------------------------

    \488\ SoCal Edison at 4-6.
    \489\ PG&E at 14-21.
---------------------------------------------------------------------------

    488. Xcel states that it is not clear whether the following result
was intended, but the definition arguably could cover a ``traditional''
utility with a franchised retail service territory that had converted
all of its wholesale sales from cost-based to market-based rates.
According to Xcel, not all utilities will be selling at cost-based
rates at wholesale, even though they may still be doing so at retail in
franchised service territories.\490\ Xcel does not believe that it
would be reasonable to exclude from the definition of ``non-regulated
power sales affiliate'' a utility that serves retail customers under a
franchised service territory. Xcel also comments that the Commission
should allow a waiver provision for utilities' subsidiaries or
affiliates to be treated under the Commission's affiliate sales rules
as affiliated utilities rather than as ``non-regulated power sales
affiliates.'' \491\ Xcel believes that the proposed definition would
generally serve to demarcate affiliates that should be treated as
regulated from those that should be treated as non-regulated under the
Commission's affiliate rules but states that it is not desirable or
beneficial to draw a completely bright line between the two. Xcel
states that some flexibility may be beneficial for both utilities and
their customers and the Commission should not foreclose innovative
structures by adopting hard and fast rules.\492\
---------------------------------------------------------------------------

    \490\ Xcel at 15.
    \491\ Id.
    \492\ Id. at 16.
---------------------------------------------------------------------------

    489. NASUCA also suggests revisions to this definition, out of
concern that several of the terms used (non-regulated, non-traditional,
regulated on a cost basis) are vague, inaccurate and unnecessary.\493\
NASUCA suggests that the term be renamed ``power sales affiliate with
market-based rates'' and defined as ``any power seller affiliate
utility, including a power marketer, exempt wholesale generator,
qualifying facility or other power seller affiliate, with market-based
rates authorized under these rules or Commission orders.'' \494\
---------------------------------------------------------------------------

    \493\ NASUCA at 30.
    \494\ Id. at 30.
---------------------------------------------------------------------------

Commission Determination
    490. The Commission will modify the definition of ``non-regulated
power sales affiliate,'' and change the term to ``market-regulated
power sales affiliate.'' \495\ In response to various commenters, we
clarify that this definition is intended to apply only to non-
franchised power sales affiliates (whose power sales are not regulated
on a cost basis under the FPA, e.g., affiliates whose power sales are
made at market-based rates) of franchised public utilities.
Additionally, while we recognize that we have used the term ``non-
regulated'' in the past, we believe that ``market-regulated'' is a more
appropriate description for the entities we intend to capture in this
definition. Accordingly, in this Final Rule, we revise the definition
of ``market-regulated power sales affiliate'' to mean ``any power
seller affiliate other than a franchised public utility, including a
power marketer, exempt wholesale generator, qualifying facility or
other power seller affiliate, whose power sales are regulated in whole
or in part at market-based rates.'' Because the revised definition
includes only non-franchised public utilities, it does not apply to a
franchised public utility that makes some sales at market-based
rates.\496\
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    \495\ NOPR at Proposed Regulations at 18 CFR 35.36(a)(6). We
adopt this regulation at 18 CFR 35.36(a)(7).
    \496\ However, under the standards of conduct, a wholesale
merchant function that engages in such sales must function
independently of the utility's transmission function. 18 CFR
358(d)(3) and 18 CFR 358.4(a)(1).
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    491. Xcel posits a somewhat different scenario under which it
believes that a franchised public utility would fall within the
definition of ``non-regulated power sales affiliate,'' namely, if such
utility makes no wholesale sales that are regulated on a cost basis
(making only wholesale sales at market-based rates) but serves retail
customers under a franchised service territory. With the revision to
the definition of ``market-regulated power sales affiliate'' that we
adopt here, such a utility would not fall within the definition of
``market-regulated power sales affiliate'' since it has a franchised
service territory.
    492. In addition, we note that the Commission has historically
placed affiliate restrictions only on the

relationship between a franchised public utility with captive customers
and any affiliated market-regulated power sales affiliate.
Nevertheless, we believe that there may be circumstances in which it
also would be appropriate to impose similar restrictions on the
relationship of two affiliated franchised public utilities where one of
the affiliates has captive customers and one does not have captive
customers. In such a case, there is a potential for the transfer of
benefits from the captive customers of the first franchised utility to
the benefit of the second franchised utility and ultimately to the
joint stockholders of the two affiliated franchised public utilities.
Commenters in the instant proceeding did not address the potential for
affiliate abuse in this situation (i.e., between a franchised public
utility with captive customers and an affiliated franchised public
utility without captive customers). Accordingly, we do not generically
impose the affiliate restrictions on such relationships but will
evaluate whether to impose the affiliate restrictions in such
situations on a case-by-case basis.
    493. However, to avoid confusion between references to a
``franchised public utility with captive customers'' and a ``franchised
public utility without captive customers'' we will revise the
definition of ``franchised public utility'' in Sec.  35.36(a)(5) to
remove the reference to captive customers. Accordingly, ``franchised
public utility'' will be defined as ``a public utility with a
franchised service obligation under State law.'' Further, we will
revise other sections of the affiliate restrictions to specifically use
the term ``franchised public utility with captive customers'' to
clarify when the affiliate restrictions apply.
    494. Additionally, not all qualifying facilities are necessarily
included in the proposed definition of ``market-regulated power sales
affiliate.'' Only those qualifying facilities whose market-based rate
sales fall under the Commission's jurisdiction would fall within the
definition of ``market-regulated power sales affiliate.'' To the extent
that some of a qualifying facility's sales are regulated under the FPA,
even if other sales are regulated by the states, such a qualifying
facility would be considered a market-regulated power sales affiliate
by virtue of its FPA jurisdictional sales.
    495. Additionally, the Commission clarifies that the definition of
``market-regulated power sales affiliate'' does not encompass all
affiliates such as parent companies or the natural gas LDC function of
the regulated franchised utility; rather, it only includes non-
franchised, power sales affiliates (sellers) that sell power in whole
or in part at market based rates, and not an affiliated service company
or others who are not authorized to make sales of power.
d. Other Definitions

    In the NOPR, the Commission proposed to adopt a restriction on
affiliate sales of electric energy, whereby no wholesale sale of
electric energy could be made between a public utility seller with a
franchised service territory and a non-regulated power sales
affiliate without first receiving Commission authorization under FPA
section 205. This restriction would be a condition of obtaining and
retaining market-based rate authority, and a failure to satisfy that
condition would be a violation of the seller's market-based rate
tariff.\497\
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    \497\ NOPR at P 108.
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Comments
    496. Constellation proposes that the language in the proposed
affiliate sales restriction provision be amended to use the defined
term ``franchised public utility'' by replacing the phrase ``public
utility Seller with a franchised service territory'' with ``Seller that
is a franchised public utility.'' Constellation submits that this
change would make clear that the affiliate restrictions apply only if
the seller is affiliated with a public utility that has captive
customers, which it states appears to be the Commission's intent.\498\
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    \498\ Constellation at 13-17.
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    497. FirstEnergy proposes that a definition of franchised service
territory be added to the regulations to clarify that the affiliate
sales restriction would only apply to transactions involving public
utilities with captive retail customers, and would not apply in areas
in which there is retail choice.\499\
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    \499\ See, e.g., FirstEnergy at 12-13.
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Commission Determination
    498. The Commission's intent was that the affiliate sales
restriction in proposed Sec.  35.39(a) (now Sec.  35.39(b)) would apply
where a utility with a franchised service territory with captive
customers proposes to make wholesale sales at market-based rates to a
market-regulated power sales affiliate, or vice versa. Accordingly, we
will revise Sec.  35.39(a) (now Sec.  35.39(b)) to replace ``public
utility Seller with a franchised service territory'' with ``franchised
public utility with captive customers.'' In light of this
clarification, we do not believe it necessary to add a definition of
franchised service territory to the regulations, as proposed by
FirstEnergy.
e. Treating Merging Companies as Affiliates
Commission Proposal
    499. In the NOPR, the Commission noted that, for purposes of
affiliate abuse, companies proposing to merge are considered affiliates
under their market-based rate tariffs while their proposed merger is
pending, and sought comments regarding at what point the Commission
should consider two non-affiliates as merging partners.\500\
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    \500\ NOPR at P 116.
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Comments
    500. PG&E comments that affiliate sales regulations should not
apply to contracts that pre-date the announcement of a merger. PG&E
states that the Commission should allow merging companies sufficient
time (e.g., 30 days) after the announcement of a merger before
enforcing the affiliate sales regulations in order to give the merging
companies time to acquire the necessary information and documents to
prevent a company from being held responsible for activities of the
merging company that it has no knowledge of or control over.\501\
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    \501\ PG&E at 14-21.
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Commission Determination
    501. The Commission will continue to require that, for purposes of
affiliate abuse, companies proposing to merge will be treated as
affiliates under their market-based rate tariffs while their proposed
merger is pending.\502\ The Commission will adopt the proposal to use
the date a merger is announced as the triggering event for considering
two non-affiliates as merging partners. In this regard, we reject
PG&E's proposal that the Commission allow an additional 30 days after
an announced merger to begin treating, for the purpose of affiliate
abuse, merging partners as affiliates. With the extensive discussions,
negotiations and review that precede the formal announcement of plans
to merge, there is sufficient time for companies to acquire the
necessary information and documents related to the proposed merger,
particularly given that utilities are on notice of our policy in this
regard.
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    \502\ Cinergy, Inc., 74 FERC ] 61,281 (1996); Consolidated
Edison Energy, Inc., 83 FERC ] 61,236 at 62,034 (1998); Central and
South West Services, Inc., 82 FERC ] 61,101 at 61,103 (1998);
Delmarva Power & Light Company, 76 FERC ] 61,331 at 62,582 (1996)
(``[T]he self-interest of two merger partners converge sufficiently,
even before they complete the merger, to compromise the market
discipline inherent in arm's-length bargaining that serves as the
primary protection against reciprocal dealing.'').
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    502. The Commission clarifies that the requirement that merging
companies

be treated as affiliates while the proposed merger is pending only
applies prospectively from the date the merger is announced and does
not apply to any contracts entered into that pre-date the announcement
of the merger.\503\ However, in the case of an umbrella agreement that
pre-dates the announcement of the merger, any transactions under such
umbrella agreement that are entered into on or after the date the
merger is announced would be subject to the affiliate restrictions.
Further, if an announced merger does not go forward, the affiliate
restrictions will cease to apply as of the date the announcement is
made that the merger will not go forward.
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    \503\ This is consistent with the standards of conduct, which
require transmission providers to post information concerning
potential merger partners as affiliates within seven days after the
potential merger is announced. 18 CFR 358.4(b)(3)(v).
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f. Treating Energy/Asset Managers as Affiliates
Commission Proposal
    503. In the NOPR, the Commission proposed that unaffiliated
entities that engage in energy/asset management of generation on behalf
of a franchised public utility with captive customers be bound by the
same affiliate restrictions as those imposed on the franchised public
utility and the non-regulated power sales affiliates.\504\ The
Commission recognized that there has been an increased range of
activities engaged in by asset or energy managers.\505\ The Commission
noted that although asset managers can provide valuable services and
benefit consumers and the marketplace, such relationships also could
result in transactions harmful to captive customers.\506\ Accordingly,
the Commission proposed that an entity managing generation for the
franchised public utility should be subject to the same affiliate
restrictions as the franchised public utility (e.g., restrictions on
affiliate sales and information sharing). The Commission referenced a
settlement in which Enforcement staff alleged that an affiliated power
marketer acting as an asset manager for three generation-owning
affiliates violated Sec.  214 of the FPA.\507\ As a result, if a
company is managing generation assets for the franchised public
utility, such entity would be subject to the same information sharing
provision as the franchised public utility with regard to information
shared with non-regulated affiliates, such as power marketers and power
producers.\508\ Similarly, asset managers of a non-regulated
affiliate's generation assets would be subject to the same affiliate
restrictions as the market-regulated power sales affiliate, including
the information sharing provision.\509\
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    \504\ NOPR at P 117, 130, 131.
    \505\ Id. at P 124 citing Kevin Heslin, A few thoughts on the
industry: Ideas from session at Globalcon, Energy User News, July 1,
2002, at 12 (Noting that prior to deregulation, ``an energy manager
had relatively straightforward tasks: Understanding applicable
tariffs, evaluating the possible installation of energy conservation
measures (ECMs), and considering whether to install on-site
generation'' but that ``now, an energy manager has to be conversant