Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, 25832-25916 [E8-9073]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 73, Number 89 (Wednesday, May 7, 2008)]
[Rules and Regulations]
[Pages 25832-25916]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-9073]



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Part II





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Part 35



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

Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / Rules 
and Regulations

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM04-7-001; Order No. 697-A]


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

Issued April 21, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Order on Rehearing and Clarification.

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SUMMARY: In this order on rehearing, the Commission affirms its basic 
determinations in Order No. 697, and grants rehearing and clarification 
regarding certain revisions to its regulations and to the standards for 
obtaining and retaining market-based rate authority for sales of 
energy, capacity and ancillary services to ensure that such sales are 
just and reasonable. The Commission also clarifies several aspects of 
the implementation process adopted in Order No. 697.

DATES: Effective Date: This rule will become effective June 6, 2008.

FOR FURTHER INFORMATION CONTACT: Debra A. Dalton (Technical 
Information), Office of Energy Market Regulation, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
(202) 502-6253, and Elizabeth Arnold (Legal Information), Office of the 
General Counsel, Federal Energy Regulatory Commission, 888 First 
Street, NE., Washington, DC 20426, (202) 502-8818.

SUPPLEMENTARY INFORMATION: 

Table of Contents

 
                                                               Paragraph
                                                                numbers
 
I. Introduction.............................................           1
II. Discussion..............................................          16
    A. Horizontal Market Power..............................          16
        1. Whether to Retain the Indicative Screens.........          16
        2. Indicative Market Share Screen Threshold Levels..          31
        3. DPT Criteria.....................................          42
        4. Other Products and Models........................          52
        5. Native Load Deduction............................          60
        6. Relevant Geographic Market.......................          68
        7. Use of Historical Data...........................         116
        8. Transmission Imports.............................         132
        9. Further Guidance Regarding Control and Commitment         147
         of Capacity........................................
    B. Vertical Market Power................................         151
        1. OATT Violations and Market-Based Rate Revocation.         151
        2. Treatment of FTRs................................         163
        3. Other Barriers to Entry..........................         166
    C. Affiliate Abuse......................................         181
        1. General Affiliate Terms & Conditions.............         182
        2. Power Sales Restrictions.........................         223
        3. Market-Based Rate Affiliate Restrictions.........         233
    D. Mitigation...........................................         260
        1. Cost-Based Rate Methodology......................         260
        2. Protecting Markets With Mitigated Sellers........         294
    E. Implementation Process...............................         341
        1. Category 1 and 2 Sellers.........................         343
        2. Regional Review and Schedule.....................         363
        3. Clarifications on Implementation Process.........         373
        4. Market-Based Rate Tariff Clarifications..........         383
    F. Legal Authority......................................         395
        1. Whether Market-Based Rates Can Satisfy the Just           395
         and Reasonable Standard Under the FPA..............
        2. Consistency of Market-Based Rate Program with FPA         435
         Filing Requirements................................
        3. Whether Existing Tariffs Must Be Found To Be              497
         Unjust and Unreasonable, and Whether the Commission
         Must Establish a Refund Effective Date.............
    G. Miscellaneous........................................         501
        1. Change in Status.................................         501
        2. Third Party Providers of Ancillary Services......         516
        3. Requesting Market-Based Rate Authority for QFs...         524
    H. Clarifications of the Commission's Regulations.......         528
III. Information Collection Statement.......................         535
IV. Document Availability...................................         536
V. Effective Date...........................................         539
Regulatory Text
Appendix A to Subpart H: Standard Screen Format
Appendix C to Order No. 697-A: Revised Tariff Language
Appendix D to Order No. 697-A: Revised Regional Review
 Schedule
Appendix E to Order No. 697-A: Petitioner Acronyms
 


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

I. Introduction

    1. On June 21, 2007, the Federal Energy Regulatory Commission 
(Commission) issued Order No. 697,\1\ codifying and, in certain 
respects, revising its standards for obtaining and retaining market-
based rates for public utilities. In order to accomplish this, as well 
as streamline the administration of the market-based rate program, the 
Commission modified its regulations at 18 CFR part 35, subpart H, 
governing market-based rate authorization. The Commission explained 
that there are three major aspects of its market-based regulatory 
regime: (1) Market power analyses of sellers and associated conditions 
and filing requirements; (2) market rules imposed on sellers that 
participate in Regional Transmission Organization (RTO) and Independent 
System Operator (ISO) organized markets; and (3) ongoing oversight and 
enforcement activities. The Final Rule focused on the first of the 
three features to ensure that market-based rates charged by public 
utilities are just and reasonable. Order No. 697 became effective on 
September 18, 2007.
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    \1\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
72 FR 39,904 (Jul. 20, 2007), FERC Stats. & Regs. ] 31,252 (2007) 
(Final Rule).
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    2. On December 14, 2007, the Commission issued an order clarifying 
four aspects of Order No. 697.\2\ Specifically, that order addressed: 
(1) The effective date for compliance with the requirements of Order 
No. 697; (2) which entities are required to file updated market power 
analyses for the Commission's regional review; (3) the data required 
for the horizontal market power analyses; and (4) what constitutes 
``seller-specific terms and conditions'' that sellers may list in their 
market-based rate tariffs in addition to the standard provisions listed 
in Appendix C to Order No. 697. The Commission also extended the 
deadline for sellers to file the first set of regional triennial 
studies that were directed in Order No. 697 from December 2007 to 30 
days after the date of issuance of the Clarification Order.
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    \2\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, 121 FERC ] 
61,260 (2007) (Clarification Order).
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    3. In this order, the Commission responds to a number of requests 
for rehearing and clarification of Order No. 697. In most respects, the 
Commission reaffirms its determinations made in Order No. 697 and 
denies rehearing of these issues. With respect to several issues, 
however, the Commission grants rehearing or provides clarification.
    4. For example, the Commission affirms in large part the 
determinations made in Order No. 697 concerning the horizontal market 
power analysis, including the use of the 20 percent threshold for the 
indicative wholesale market share screen and the Delivered Price Test 
(DPT), the use of a 2,500 Hirschman-Herfindahl Index (HHI) threshold 
for the DPT analysis, and the use of the average peak native load as 
the native load proxy for the indicative wholesale market share screen 
and DPT analysis. The Commission also affirms its decision to use a 
balancing authority area or the RTO/ISO region as the default relevant 
geographic market. Similarly, the Commission affirms the decision that, 
where the Commission has made a specific finding that there is a 
submarket within an RTO/ISO, that submarket should be considered the 
default relevant geographic market. However, the Commission grants 
rehearing concerning the finding that Northern PSEG is a submarket 
within PJM. On reconsideration, we conclude that we erred in relying on 
a finding of a submarket in a particular proceeding that was 
subsequently vacated on procedural grounds.
    5. In response to requests for clarification concerning existing 
mitigation in RTO/ISOs, the Commission adopts a rebuttable presumption 
that the existing Commission-approved RTO/ISO mitigation is sufficient 
to address market power concerns in the RTO/ISO market, including 
mitigation applicable to RTO/ISO submarkets. However, intervenors may 
challenge that presumption. Depending on the nature of the evidence 
submitted by an intervenor, the Commission will consider whether to 
institute a separate section 206 proceeding to investigate whether the 
existing RTO/ISO mitigation continues to be just and reasonable.
    6. While the Commission affirms its determination to continue the 
use of historical data and a ``snapshot in time approach,'' the 
Commission will consider sensitivity studies, on a case-by-case basis, 
that present clear and compelling evidence that certain changes in a 
market should be taken into account as part of the market power 
analysis in a particular case.
    7. With regard to simultaneous transmission import limit (SIL) 
studies, the Commission clarifies that the use of simultaneous total 
transfer capability (TTC) in the SIL study must properly account for 
all firm transmission reservations, transmission reliability margin, 
and capacity benefit margin.
    8. The Commission affirms its determinations concerning the 
vertical market power analysis and clarifies that sellers are not 
required to report on financial transmission rights as part of the 
vertical market power analysis.
    9. The Commission codifies in the regulations at 18 CFR 35.36 a 
definition of ``affiliate'' for purposes of Order No. 697 based on the 
definition adopted in the Affiliate Transactions Final Rule.\3\ In 
addition, the Commission reiterates in this order a number of 
clarifications that it made in the Affiliate Transactions Final Rule 
regarding the term ``captive customers,'' the purpose of the 
definition, and its focus on ``cost-based regulation.'' Among other 
things, the Commission notes that if a state regulatory authority in a 
retail choice state does not believe that retail customers are 
sufficiently protected and that our affiliate restrictions should apply 
to the local franchised public utility, it may ask the Commission to 
deem its retail customers to be captive customers for purposes of 
applying the affiliate restrictions.
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    \3\ Cross-Subsidization Restrictions on Affiliate Transaction, 
Order No. 707, 73 FR 11013 (Feb. 29, 2008), FERC Stats. & Regs. ] 
31,264 (Feb. 21, 2008) (Affiliate Transactions Final Rule).
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    10. The Commission clarifies that the new affiliate restriction 
regulations promulgated in Order No. 697 supersede codes of conduct 
approved by the Commission prior to the effective date of Order No. 
697. The Commission also provides a number of clarifications concerning 
employees who are not subject to the independent functioning 
requirement. Further, the Commission grants rehearing regarding the 
adoption of a two-way information sharing restriction in 18 CFR 
35.39(d), finding, among other things, that a one-way information 
sharing restriction adequately protects captive customers.
    11. The Commission for the most part affirms its determinations 
concerning mitigation, including retaining the Commission's default 
mitigation and declining to impose a generic ``must offer'' 
requirement. The Commission clarifies that it has not prejudged the 
types of specific situations in which it might impose a ``must offer'' 
requirement on a particular seller. In response to rehearing requests 
concerning the Commission's mitigation of long-term transactions based 
on the result of a failure of a short-term indicative screen, the 
Commission is modifying its policy with respect to

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mitigation of long-term transactions (one year or more in duration). In 
this regard, the Commission will allow a mitigated seller to 
demonstrate on a case-by-case basis that it does not have market power 
with respect to a specific long-term contract.
    12. Concerning the tariff provision adopted in the Final Rule for 
mitigated sellers that want to make market-based rate sales at the 
metered boundary between a balancing authority area in which the seller 
was found, or presumed, to have market power and a balancing authority 
area in which the seller has market-based rate authority, after 
considering comments raised regarding the difficulty of determining and 
documenting whether the power sold is intended to serve load in the 
balancing authority area in which the seller has market power, the 
Commission is revising the tariff language to eliminate the intent 
element.
    13. The Commission affirms, among other things, its determination 
in Order No. 697 to create a category of market-based rate sellers 
(Category 1 sellers) that are not required to automatically submit 
updated market power analyses, as well as its decision to adopt a 
regional filing process for updated market power analyses. In response 
to concerns raised regarding the potential for Category 1 sellers to 
exercise market power in load pockets or other transmission-constrained 
areas, we explain that we are modifying our approach. To the extent 
that a Commission-identified submarket is under analysis (relevant 
submarket), if the Commission determines based on analysis of 
indicative screens filed by other sellers that there may be potential 
market power concerns with respect to any Category 1 sellers in the 
relevant submarket, the Commission will, if appropriate, require an 
updated market power analysis to be filed by such Category 1 sellers 
and allow other parties to comment. In this regard, the Commission 
would be exercising its right to require an updated market power 
analysis at any time.
    14. The Commission also provides clarifications regarding other 
aspects of the Final Rule, including addressing questions that have 
arisen concerning the implementation process adopted in Order No. 697 
and providing clarifications concerning the change in status reporting 
requirement.
    15. Finally, the Commission rejects as without merit arguments 
raised by petitioners challenging the Commission's authority to adopt 
market-based rates and alleging that the market-based rate program 
fails to comply with the requirements of the FPA.

II. Discussion

A. Horizontal Market Power

1. Whether To Retain the Indicative Screens
Final Rule
    16. In Order No. 697, the Commission adopted, with some 
modifications, two indicative market power screens (the uncommitted 
market share screen and the uncommitted pivotal supplier screen) to 
determine whether sellers may have market power and should be further 
examined. The Commission explained that sellers that fail either screen 
would rebuttably be presumed to have market power, but they would have 
an opportunity to present evidence (through the submission of a 
Delivered Price Test (DPT) analysis) demonstrating they do not have 
market power. The Commission concluded that, although some sellers 
disagree with the use of two screens or find flaws in them, the 
conservative approach of using two screens together would allow the 
Commission to more readily identify potential market power by measuring 
market power at both peak and off-peak times and both unilaterally and 
in coordinated interaction with other sellers. The Commission explained 
that a conservative approach at the indicative screen stage of the 
proceeding is warranted because, if a seller passes both of the 
indicative screens, there is a rebuttable presumption that it does not 
possess horizontal market power.\4\ In conclusion, the approach 
represented an appropriate balance between the need to protect against 
market power and the desire not to place unnecessary filing burdens on 
utilities.\5\
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    \4\ Order No. 697 at P 62.
    \5\ Id. P 33, 35.
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    17. The wholesale market share screen measures for each of the four 
seasons whether a seller has a dominant position in the market based on 
the number of megawatts of uncommitted capacity owned or controlled by 
the seller as compared to the uncommitted capacity of the entire 
relevant market. When calculating uncommitted capacity, a seller adds 
the total nameplate or seasonal capacity of generation owned or 
controlled through contract plus long-term firm purchases and deducts 
operating reserves, native load commitments, and long-term firm 
sales.\6\
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    \6\ Order No. 697 states that uncommitted capacity is determined 
by adding the total nameplate capacity of generation owned or 
controlled through contract and firm purchases, less operating 
reserves, native load commitments and long-term firm sales. Order 
No. 697 at P 38. Order No. 697 further states that uncommitted 
capacity from a seller's remote generation (generation located in an 
adjoining balancing authority area) should be included in the 
seller's total uncommitted capacity amounts. Id. However, one of the 
standard screen formats included at Appendix A to Order No. 697 does 
not capture these details. Part I--Pivotal Supplier Analysis, 
inadvertently does not include Row H (imported power) and Row M 
(average daily Peak Native Load in Peak month, a proxy for native 
load commitment) in calculating Row K (total uncommitted supply). We 
thus correct this error in the Revised Appendix A to include the 
missing variables of the equation.
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    18. The pivotal supplier analysis evaluates the potential of a 
seller to exercise market power based on uncommitted capacity at the 
time of the relevant market's annual peak demand, focusing on the 
seller's ability to exercise market power unilaterally. It examines 
whether the market demand can be met absent the seller during peak 
times; a seller is determined to be pivotal if demand cannot be met 
without some contribution of supply by the seller or its affiliates. 
For purposes of identifying the wholesale market, the Commission 
explained that the ``proxy for the wholesale load is the annual peak 
load (needle peak) less the proxy for native load obligation (i.e., the 
average of the daily native load peaks during the month in which the 
annual peak load day occurs).'' \7\
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    \7\ Id. P 41.
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    19. The Commission chose not to adopt suggestions to alter the 
indicative screens in order to incorporate a contestable load analysis, 
as proposed by some commenters. Such an analysis would consider the 
amount of excess market supply available to serve the amount of 
wholesale demand seeking supply at a particular moment in time.\8\ The 
Commission reasoned that such an analysis is essentially a variant on 
the pivotal supplier screen with differences in the calculation of 
wholesale load and the test thresholds since it addresses whether 
suppliers other than the seller can meet the demand in the relevant 
market. The Commission concluded that incorporating such an analysis 
would not improve its ability to establish a presumption of whether a 
seller has market power, and ``without the market share indicative 
screen, the Commission would have insufficient information because 
there would be no analysis of a seller's size relative to the other 
sellers in the market, and no information on the seller's market power 
during off-peak periods.'' \9\ Additionally, the

[[Page 25835]]

Commission noted that the contestable load analysis fails to consider 
the relative price of the competing supplies and thus whether the 
available non-applicant supply is competitively priced and, hence, in 
the market.\10\
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    \8\ See Id. P 49. Generally, advocates of the contestable load 
analysis believe that, if available non-applicant supply is at least 
twice the contestable load, that is sufficient to make a finding 
that the market is competitive.
    \9\ Id. P 66.
    \10\ Order No. 697 also dealt with the following issues, about 
which rehearing has not been sought: Control and commitment of 
generation resources; elimination of former 18 CFR 35.27, which had 
exempted newly-constructed generation from the horizontal market 
power analysis; reporting format for the indicative screens; 
nameplate capacity; and several procedural issues.
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Requests for Rehearing
    20. On rehearing, Southern contends that the Final Rule violates 
the requirement in FPA section 206 that the Commission bears the burden 
of proof in section 206 proceedings and that the Commission's 
determinations be based on substantial evidence.\11\ According to 
Southern, this shifting of the burden of proof occurs through the use 
of indicative screens that Southern submits are inherently flawed and 
which, if failed, result in a presumption of market power that must be 
rebutted by sellers. Southern states that once a screen failure occurs 
and a presumption of market power arises, a seller only has two 
options: either accept a determination that it has market power and 
adopt cost-based rate mitigation measures, or provide the Commission 
with a DPT analysis.\12\ Southern concludes that by applying the 
indicative screens codified in the Final Rule, the Commission will 
effectively shift to sellers the evidentiary burden in a section 206 
proceeding.\13\ Southern argues that the screens are inherently flawed 
in their ability to definitively assess market power when none is 
actually present, noting that the Final Rule acknowledges that the 
screens are conservative in nature and may result in false positives 
indicating market power.\14\ Southern argues that because of their 
conservative nature and propensity to result in false positives, such 
screens cannot properly provide a basis for shifting the burden of 
proof to sellers, and are incapable of providing substantial evidence 
of market power.
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    \11\ Southern Rehearing Request at 7-8 (citing 16 U.S.C. 
824e(a); FPC v. Sierra Pacific Power Co., 350 U.S. 348 at 353 (1956) 
(Sierra); Public Service Commission of New York v. FERC, 642 F.2d 
1335, 1345 (D.C. Cir. 1980); Public Service Co. of New Mexico, 115 
FERC ] 61,090, at P 33 (2006)).
    \12\ Id. at 7 (citing Order No. 697 at P 63).
    \13\ Id. at 8.
    \14\ Id. (citing Order No. 697 at P 62, 71, 74, 89). Further, 
Southern asserts that only in instances of high market share should 
a prima facie case of market power be established, which would shift 
the burden of proof. Id. at 10 & n.10 (citing U.S. v. Syufy, 903 
F.2d 659, 664 (9th Cir. 1990); Hunt-Wesson Foods, Inc. v. Ragu 
Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980), cert. denied, 450 
U.S. 921 (1981)).
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    21. To remedy this, Southern argues that the Commission should 
reconsider its determination in the Final Rule that a failure of an 
indicative screen results in a presumption of market power. Instead, 
the Commission should determine that the indicative screens are only 
intended to identify sellers that appear to raise no horizontal market 
power concerns and thus can be considered for market-based rate 
authority without the necessity of further analysis. In other words, 
passing the screens should raise a favorable presumption that a seller 
does not have market power, and a seller would never be ``presumed'' to 
have generation market power.\15\
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    \15\ Id. at 11.
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    22. Southern further argues that the Final Rule's market share 
screen and its application of the DPT are arbitrary and capricious, not 
supported by substantial evidence, without a rational basis, and 
contrary to established legal precedent.\16\ Specifically, Southern 
contends that the market share screen and the DPT improperly fail to 
account for the size of the wholesale market demand that could be 
served by the uncommitted capacity in the relevant region.\17\ Southern 
argues that wholesale market demand should be considered in the market 
share screen and the DPT because market power concerns only exist if a 
seller has the power to raise prices above competitive levels or 
exclude competition in the relevant market for a not insubstantial 
amount of time.\18\ According to Southern, even the Department of 
Justice (DOJ) merger analysis, on which the Final Rule relies, would 
take the wholesale market into account when determining an entity's 
``market share.'' \19\ Southern comments that in the Final Rule the 
Commission appeared to give four reasons why it was unwilling to 
consider market demand (i.e., contestable load), and contends that 
these reasons provide an insufficient basis for rejecting a contestable 
load analysis.\20\ Southern believes that the weight of the evidence 
clearly demonstrates that to be legitimate indicators of market power, 
the market share screen and DPT should take the relevant wholesale 
demand into account.
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    \16\ Id. at 20 (citing 5 U.S.C. 706(2)(A) and (E) (2000); Union 
Pac. Fuels, Inc. v. FERC, 129 F.3d 157, 161 (D.C. Cir. 1997) 
(holding that review of Commission orders is made under the 
arbitrary and capricious standard of the Administrative Procedure 
Act); Sithe Independence Power Partners v. FERC, 165 F.3d 944 (D.C. 
Cir. 1999) (stating that the Commission must be able to demonstrate 
that it has ``made a reasoned decision based upon substantial 
evidence in the record'' and the ``path of [its] reasoning'' must be 
clear) (quoting Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C. Cir. 
1992)).
    \17\ Id. at 3-4 (citing United States v. Grinnell Corp., 384 
U.S. 563, 571 (1966); MetroNet Services Corp. v. U.S. West 
Communications, 329 F.3d 986 (9th Cir. 2003); United States v. 
Dentsply International, Inc., 399 F.3d 181, 187 (3rd Cir. 2005)).
    \18\ Id. at 12-13.
    \19\ Id. at 13.
    \20\ Id. at 15 and Frame affidavit at ] 25, referring to Order 
No. 697 at P 66-67.
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Commission Determination
    23. We disagree with Southern's contention that the Final Rule 
violates the requirement in the FPA that the Commission bears the 
burden of proof in section 206 proceedings. We also disagree with 
Southern's view that failure of the indicative screen(s) does not 
provide a sufficient basis to establish a rebuttable presumption of 
market power.
    24. As a general matter, we agree that the burden of proof in a 
section 206 proceeding is on the Commission where the Commission 
institutes the proceeding on its own motion. However, we find 
Southern's argument that the burden of proof in a section 206 
proceeding is unlawfully shifted to entities that fail one of the 
indicative screens to be without merit. As an initial matter, the 
burden of going forward is on the Commission in the first instance, and 
ultimately, when the Commission institutes a proceeding under section 
206 of the FPA. In the Final Rule, the Commission has established 
through rulemaking a generic test to support its burden of going 
forward: A seller's failure of one of the indicative screens 
establishes a rebuttable presumption of market power. The burden of 
going forward then shifts to the seller once such a proceeding is 
initiated to rebut the presumption of market power. Once the seller 
submits additional evidence to rebut the presumption of market power, 
the Commission must determine, based on substantial evidence in the 
record, whether the seller has market power. Thus, the ultimate burden 
of proof under FPA section 206 remains with the Commission.\21\ On this 
basis, the

[[Page 25836]]

Commission is not unlawfully shifting the burden of proof to the seller 
that fails one of the screens.
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    \21\ See AEP Power Marketing, Inc., 108 FERC ] 61,026, at P 30 
(2004) (July 8 Order) (``Failure of a screen establishes a 
rebuttable presumption of market power, which satisfies the 
Commission's initial burden of going forward in such proceedings. 
The burden of going forward will then be upon the applicant once 
such a proceeding is initiated.''); see Id. P 29 (stating that 
passing both screens or failing one merely establishes a rebuttable 
presumption, and explaining that in the case of an intervenor in a 
section 205 proceeding that seeks to prove that the applicant 
possesses market power, ``the intervenor need only meet a `burden of 
going forward' with evidence that rebuts the results of the screens. 
At that point, the burden of going forward would revert back to the 
applicant to prove that it lacks market power.'') (citing Pennzoil 
Co. v. FERC, 645 F.2d 360, 392 (5th Cir. 1981), cert. denied, 454 
U.S. 1142 (1982); accord Transcontinental Gas Pipe Line Corp., 
Opinion No. 135, 17 FERC ] 61,232, at 61,450 (1981) (``The 
presumption * * * is the same as that which arises from a prima 
facie case: It imposes on the party against whom it is directed the 
burden of going forward with substantial evidence to rebut or meet 
the presumption, but does not shift the burden of persuasion.''); 
Generic Determination of Rate of Return on Common Equity for 
Electric Utilities, Order No. 389-A, 29 FERC ] 61,223, at 61,458 
(1984) (concluding that rebuttable presumption that a rate of return 
based on a benchmark is just and reasonable does not shift ultimate 
burden of proof imposed by Federal Power Act)); see also Southern 
Companies Energy Marketing, Inc., 111 FERC ] 61,144, at P 24 (2005) 
(stating that a ``screen failure satisfies the Commission's burden 
of going forward and shifts to the applicant the burden of 
presenting evidence rebutting the presumption of market power''), 
order dismissing reh'g as moot, 119 FERC ] 61,300 (2007).
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    25. Moreover, in Order No. 697, the Commission addressed an 
argument by Southern that failure of the screens does not provide a 
sufficient basis to establish a rebuttable presumption of market power, 
and Southern has failed on rehearing to convince us that a seller 
should never be presumed to have generation market power. In 
particular, the Commission explained that the indicative screens are 
intended to identify the sellers that raise no horizontal market power 
concerns and can otherwise be considered for market-based rate 
authority. Sellers failing one or both of the indicative screens, on 
the other hand, are identified as sellers that potentially possess 
horizontal market power and for which a more robust analysis is 
required. The Commission explained that the uncommitted pivotal 
supplier screen focuses on the ability to exercise market power 
unilaterally. Failure of this screen indicates that some or all of the 
seller's generation must run to meet peak load. The uncommitted market 
share analysis indicates whether a supplier has a dominant position in 
the market. Failure of the uncommitted market share screen may indicate 
that the seller has unilateral market power and may also indicate the 
presence of the ability to facilitate coordinated interaction with 
other sellers. It is on this basis that the Commission finds that a 
rebuttable presumption of market power is warranted when a seller fails 
one or both of the indicative screens. The screens themselves represent 
the first piece of evidence that the potential for market power exists 
since failure of one or both of the screens indicates that the seller 
may be a pivotal supplier in the market or has a high enough market 
share of uncommitted capacity to raise horizontal market power 
concerns.\22\ In addition, we note that although we find that failure 
of an indicative screen is a sufficient basis to establish a 
presumption of market power, the Commission allows such a seller to 
continue to sell under market-based rate authority until a definitive 
finding is made, albeit with rates subject to refund to protect 
customers.
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    \22\ See Order No. 697 at P 65.
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    26. We disagree with Southern's argument that the indicative 
screens have a propensity to result in false positive indications of 
market power, do not provide substantial evidence of market power and, 
therefore, cannot provide a basis for shifting the evidentiary burden 
to sellers. As we explained in Order No. 697, the indicative screens 
are intended to screen out those sellers that raise no horizontal 
market power concerns and can otherwise be considered for market-based 
rate authority from those sellers that raise concerns but may not 
necessarily possess horizontal market power.\23\ While we recognize 
that the conservative nature of the screens may result in some false 
positives, a conservative approach at the indicative screen stage is 
warranted because if a seller passes both of the indicative screens, 
there is a rebuttable presumption that it does not possess horizontal 
market power. Thus, we must weigh the risk of false positives and any 
resulting repercussions on a seller (e.g., section 206 proceeding, rate 
subject to refund, temporary regulatory uncertainty) against the costs 
of adopting a less conservative screen or eliminating the market share 
indicative screen.\24\ In particular, if the screens result in a false 
positive indication of market power, the seller has the opportunity to 
rebut the presumption of market power while it continues to have 
market-based rate authority. However, if we were to adopt a less 
conservative screen, that could result in a false negative, i.e., a 
false indication of no market power and customers would not be 
adequately protected. Accordingly, if the Commission were to adopt 
Southern's approach we are concerned that false negatives would become 
a reality and the Commission would not be able to fulfill its FPA 
section 205 and 206 mandate to ensure just, reasonable and not unduly 
discriminatory rates. On this basis, we believe that evidence of an 
indicative screen failure is sufficient to establish a rebuttable 
presumption of market power, in which case the seller will then have 
the opportunity to rebut that presumption of market power.
---------------------------------------------------------------------------

    \23\ Id. P 62.
    \24\ Id. P 71.
---------------------------------------------------------------------------

    27. Additionally, in response to Southern's concerns regarding the 
conservative nature of the indicative screens, Order No. 697 changed 
the native load proxy under the market share indicative screen from the 
minimum native load peak demand for the season to the average of the 
daily native load peak demands for the season, making the native load 
proxy for the market share indicative screen consistent with the native 
load proxy under the pivotal supplier screen.\25\ A native load proxy 
based on the average of peak load conditions is more representative, 
and thus more accurate, than a proxy based on minimum peak load 
conditions. Basing the native load proxy on the average of the peaks 
will make the screens more accurate in eliminating sellers without 
market power while focusing on ones that may have market power.\26\ 
Thus, the updated native load proxy will reduce the likelihood that 
false positive indications of market power will occur.
---------------------------------------------------------------------------

    \25\ Id. P 135.
    \26\ Id. P 137.
---------------------------------------------------------------------------

    28. Accordingly, we affirm our determination in the Final Rule that 
a failure of an indicative screen results in a presumption of market 
power, and reject Southern's proposal that a seller never be 
``presumed'' to have horizontal market power as a result of an 
indicative screen failure.\27\
---------------------------------------------------------------------------

    \27\ Southern Rehearing Request at 11.
---------------------------------------------------------------------------

    29. The Commission also disagrees with Southern's assertion that 
the market share screen and the DPT analysis do not account for the 
size of wholesale market demand, and are therefore arbitrary and 
capricious.\28\ While Southern may disagree with our approach to 
considering wholesale market demand, both the market share screen and 
the DPT consider wholesale market demand by considering uncommitted 
capacity. Uncommitted capacity considers wholesale market demand by 
reducing the seller's available capacity by the amount of capacity 
committed to serve demand. In addition, in both the initial screen and 
the DPT, the Commission requires a pivotal supplier analysis, which 
looks at whether there is sufficient competing supply to serve 
wholesale demand.
---------------------------------------------------------------------------

    \28\ We further address Southern's arguments with regard to the 
DPT analysis below.
---------------------------------------------------------------------------

    30. In addition, we disagree with Southern that our choice of how 
to account for the wholesale market demand has resulted in the market 
share screen and the DPT being arbitrary and

[[Page 25837]]

capricious. The development of the market share screen and the DPT 
resulted from lengthy public proceedings at which varying perspectives 
and arguments were taken into account. Over the years, and in light of 
the Commission's FPA responsibilities, the Commission has carefully 
considered various points of view in an open transparent dialogue with 
the electric industry and has based its determinations on sound 
regulatory principles. In particular, the market share screen provides 
a straightforward economically sound and accepted method to identify 
those sellers that have the potential to exercise market power.\29\ The 
uncommitted pivotal supplier screen measures the ability of the firm to 
dominate the market at peak periods. Further, the market share screen 
indicates whether a supplier may have a dominant position in the market 
and measures the ability of a seller to affect coordinated interaction 
with other sellers that could be accomplished during both peak and off-
peak times. The market share screen is useful in measuring market power 
because it measures a seller's size relative to others in the market, 
specifically, the seller's share of generating capacity that is 
uncommitted after accounting for its obligations to serve native load. 
It also provides a snapshot of these market shares in each season of 
the year.\30\ Thus, the indicative screens measure a seller's market 
power at both peak and off-peak times and therefore indirectly measure 
market power potential during periods of both relatively high and low 
demand.\31\ With regard to Southern's argument that in the Final Rule 
the Commission appeared to give four reasons why it was unwilling to 
consider market demand (i.e., contestable load), and Southern's 
contention that these reasons provide an insufficient basis for 
rejecting a contestable load analysis, we reaffirm our determination 
that the contestable load analysis is flawed and essentially a variant 
on the pivotal supplier screen.\32\ Like the pivotal supplier screen, 
the contestable load analysis addresses whether suppliers other than 
the seller can meet the demand in the relevant market. Thus, 
incorporating such an analysis would not improve our ability to 
establish a presumption of whether a seller possesses market power and 
would add little useful information.\33\
---------------------------------------------------------------------------

    \29\ See In the Matter of Merger Policy Under the Federal Power 
Act, May 7, 1996, Comments of the U.S. Department of Justice, Docket 
No. RM96-6-000 (providing comments on the Commission's standards for 
determining whether a proposed merger is in the public interest, 
recommending that the Commission apply a market share screen to 
identify quickly those mergers that are unlikely to raise 
competitive issues and concluding that the Horizontal Merger 
Guidelines provide ``sound competitive analysis''); see also U.S. 
Department of Justice and the Federal Trade Commission, Horizontal 
Merger Guidelines, section 2.0, reprinted at 4 Trade Reg. Rep. (CCH) 
] 13,104 (Issued April 2, 1992, Revised April 8, 1998).
    \30\ Order No. 697 at P 65.
    \31\ Id.
    \32\ Id. P 66.
    \33\ Id.
---------------------------------------------------------------------------

2. Indicative Market Share Screen Threshold Levels
Final Rule
    31. Order No. 697 retained the 20 percent threshold for the 
wholesale market share screen (i.e., with a market share of less than 
20 percent, the seller passes the screen). The Commission reasoned that 
a relatively conservative threshold for passing the market share screen 
was appropriate, explaining that the screens are indicative of market 
power, not definitive. Responding to arguments that the Commission 
should use a 35 percent threshold as a presumption of market power 
because the U.S. Department of Justice (DOJ) merger guidelines state 
that only firms with 35 percent of more market share have market power, 
the Commission explained:

    In a market comprised of five equal-sized firms with 20 percent 
market shares, the HHI is 2,000, which is above the DOJ/FTC HHI 
threshold of 1,800 for a highly concentrated market, and in markets 
for commodities with low demand price-responsiveness like 
electricity, market power is more likely to be present at lower 
market shares than in markets with high demand elasticity.\34\
---------------------------------------------------------------------------

    \34\ Id. P 89.

    32. The Commission continued that, when arguing that a 20 percent 
threshold for the market share screen is too low, commenters ignored 
that the indicative screens are based on uncommitted capacity, not 
total capacity; as a result, a substantial amount of seller capacity 
may not be counted in measures of market share. The Commission, 
therefore, concluded that the 20 percent threshold strikes the right 
balance in seeking to avoid both false negative and false positive 
results.\35\
---------------------------------------------------------------------------

    \35\ Id. P 91.
---------------------------------------------------------------------------

Requests for Rehearing
    33. Southern asserts that the Final Rule arbitrarily utilizes a 20 
percent market share threshold to establish a presumption of market 
power.\36\ Further, Southern argues that the 20 percent threshold is 
contrary to legal precedent holding that a higher market share is 
required to warrant market power concerns.\37\
---------------------------------------------------------------------------

    \36\ Southern Rehearing Request at 4 (citing DOJ 1984 Merger 
Guidelines, Section 2.4; Edison Mission Energy, Inc. v. FERC, 394 
F.3d 964, 968 (D.C. Cir. 2005) (stating that the Commission must 
``articulate a satisfactory explanation for its action including a 
`rational connection between the facts found and the choice made.' 
'') (quoting Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. 
Co., 463 U.S. 29, 43 (1983)).
    \37\ Id.
---------------------------------------------------------------------------

    34. Southern argues that, contrary to the Commission's assertions, 
the 1984 Merger Guidelines do not support the 20 percent figure used in 
the market share screen. First, it states that while the particular 
sentence cited by the Commission from section 4.134 of the 1984 
guidelines does actually contain the words ``market share of 20 
percent,'' it does not support the application of a 20 percent 
threshold under the market share screen when considered in proper 
context, since other portions of the 1984 Merger Guidelines indicate 
that the DOJ's definition of ``market share'' in the context of merger 
evaluation is different from the Commission's definition of ``market 
share'' under its market share screen.\38\ Second, Southern argues that 
according to the very sentence cited in the Final Rule from the 1984 
Merger Guidelines, the 20 percent ``market share'' threshold refers 
only to the market share of the acquired firm in the overall context of 
a proposed merger of multiple firms. It does not refer to the market 
share of the merged firm post-acquisition, nor does it even refer to 
the market share of the acquiring firm. Third, Southern argues that the 
Commission's reliance on the 20 percent threshold in section 4.134 of 
DOJ's 1984 Merger Guidelines is misplaced because that provision is 
outdated--it is not included in DOJ's current horizontal merger 
guidelines. In this regard, the 1984 Merger Guidelines were used to 
evaluate both vertical and horizontal mergers. The newer versions of 
DOJ's horizontal merger guidelines subsequently adopted in 1992 and 
1997 do not carry forward section 4.134's 20 percent market share 
threshold. Thus, the market share of a single firm does not 
automatically translate into a high HHI as the Commission suggests.\39\
---------------------------------------------------------------------------

    \38\ The Final Rule cited section 4.134, stating ``[t]he 20 
percent threshold is consistent with Sec.  4.134 of the U.S. 
Department of Justice 1984 Merger Guidelines issued June 14, 1984, 
reprinted in Trade Reg. Rep. P 13,103 (CCH 1988): `The Department 
[of Justice] is likely to challenge any merger satisfying the other 
conditions in which the acquired firm has a market share of 20 
percent or more.' '' Order No. 697 at n.21.
    \39\ Id. at 16-19.
---------------------------------------------------------------------------

    35. Southern also argues on rehearing that section 2 of the Sherman 
Antitrust Act, which prohibits not only actual

[[Page 25838]]

monopolization but also attempted monopolization and conspiracy to 
monopolize, has spawned a well-established body of law to address the 
type of market concerns that the Commission attempts to address in the 
Final Rule. Southern contends that the Commission's 20 percent 
threshold falls short when measured against the jurisprudence 
interpreting section 2 of the Sherman Act and that a more relevant 
threshold in a non-merger context would arguably be closer to 90 
percent than 20 percent.\40\ Whether the Commission's concern arises 
out of the unilateral ability of a utility to exert market power or the 
ability of two or more utilities to act concertedly in a way that 
restrains trade, Southern argues that jurisprudence interpreting the 
Sherman Act more appropriately addresses those concerns than does 
merger analysis. Aside from the authorities supporting a rule of law 
that less than at least a 50 percent market share should be 
insufficient to suggest market power, Southern argues that many cases 
and commentators may be cited for the proposition that the Commission's 
20 percent threshold is misguided and lacks a rational basis; 
relatively low market shares should, as a matter of law, preclude 
findings of market power.\41\ Southern adds that the courts have not 
only consistently held that market shares in the 20 percent range are 
insufficient to support a finding of actual monopoly power under 
section 2 of the Sherman Act, but also have found little difficulty in 
determining that such market share is not enough to sustain even a 
claim of attempted monopolization under section 2.\42\
---------------------------------------------------------------------------

    \40\ Id. at 20 (citing Hiland Dairy v. Kroger, 402 F.2d 968, 976 
(8th Cir. 1968) (rejecting 60 or 33 percent market share); Robinson 
v. Magovern, 521 F. Supp. 842, 887 (W.D. Pa. 1981)).
    \41\ Id. at 22-23 (citing Cargill, Inc. v. Monfort of Colorado, 
Inc., 479 U.S. 104, 119 n.15 (1986) (noting that 20.4 percent market 
share is probably insufficient to sustain predatory pricing, and 
citing authorities indicating that 60 percent or more would be 
necessary); Bailey v. Allgas, Inc., 284 F.3d 1237, 1250 (11th Cir. 
2002); Yoder Bros., Inc. v. California-Florida Plant Corp., 537 F.2d 
1347, 1368 (5th Cir. 1976) (stating that a 20 percent market share 
was insufficient as a matter of law to prove market power)).
    \42\ Id. at 24 (citing H.L. Hayden Co. of New York, Inc., v. 
Siemens Medical Systems, Inc., 879 F.2d 1005, 1017 (2nd Cir. 1989); 
Nifty Foods Corp. v. Great Atl. & Pac. Tea Co., 614 F.2d 832, 841 
(2nd Cir. 1980) (one-third market share not enough); U.S. v. ALCOA, 
148 F.2d 416, 424 (2nd Cir. 1945).
---------------------------------------------------------------------------

    36. NASUCA argues on rehearing that in calculating market share 
when screening for horizontal market power, the Commission should not 
subtract capacity needed for long-term contracts as ``committed'' if 
the contracts are indexed or linked to spot market prices. NASUCA 
asserts that a seller with a market share of capacity greater than 20 
percent can reduce it, and pass a market power screen it would 
otherwise fail, by ``committing'' portions of its capacity. NASUCA 
states that it requested in its NOPR comments that the Commission 
clarify that it will not consider capacity dedicated to meeting long-
term contract sales of energy to be ``committed''--and thus disregarded 
from market share--if the price of energy in the long-term contracts is 
indexed or linked to spot market prices. NASUCA contends that it 
identified relevant research in support of its request in citing a 
model that withdraws the capacity committed under the long-term 
contracts from the short-run market.\43\ NASUCA states that the 
Commission overlooked NASUCA's request, and therefore requests that the 
Commission grant its requested clarification because research indicates 
that long-term contracts linked to spot market prices do not reduce, 
and may exacerbate, the ability of a seller to raise spot market prices 
above competitive levels.\44\ In the alternative, NASUCA seeks further 
proceedings to examine the exercise of market power by sellers who pass 
market screens due to their contractual commitment to make long-term 
energy sales at rates indexed to spot market prices.
---------------------------------------------------------------------------

    \43\ NASUCA Rehearing Request at 8 (citing Chloe Lo Coq. Index 
Contracts and Spot Market Competition, University of California 
Energy Institute, Center for the Study of Energy Markets, June 2006, 
p. 15, available at https://www.ucei.berkeley.edu/ThirdTierButtons/
PDFButton_Off.jpg).
    \44\ Id. (citing Order No. 697 at P 82-93).
---------------------------------------------------------------------------

Commission Determination
    37. We affirm our determination to retain the 20 percent threshold 
for the indicative wholesale market share screen. Use of the 20 percent 
market share threshold is appropriate since the screen is indicative, 
not dispositive. Southern's arguments suggest that the 20 percent is 
dispositive, but it is not. If a seller fails the indicative screens, 
it can submit a full DPT analysis in which a range of factors are 
considered, including market shares, HHIs (market concentration) and 
other factors affecting the relevant markets. A 20 percent market share 
is not even considered dispositive at that stage; rather, we have 
approved market-based rates in several cases where a supplier had a 
market share exceeding 20 percent.\45\ In addition, we note that the 
cases cited by Southern, where much higher market shares were allowed, 
involve markets other than electricity.\46\ Electricity markets possess 
unique characteristics including, but not limited to, inelastic demand 
and the need to balance the entire transmission grid in real-time. 
Economic theory and empirical estimates of the short-run elasticities 
of electricity demand suggest that these unique conditions allow 
sellers in wholesale electricity markets to exercise market power using 
a much more limited withholding of supply than industries listed in the 
cases cited by Southern.\47\ Thus, the use of a conservative threshold 
such as a 20 percent market share is warranted, particularly for an 
indicative screen.
---------------------------------------------------------------------------

    \45\ PPL Montana, LLC, 115 FERC ] 61,204, at P 41 (2006), order 
denying reh'g, 120 FERC ] 61,096 (2007); Kansas City Power and Light 
Co., 113 FERC ] 61,074, at P 26, 30 (2005); PacifiCorp, 115 FERC ] 
61,349, at P 29, 32 (2006); Tampa Electric Co., 117 FERC ] 61,311, 
at P 26-27 (2006).
    \46\ Hiland Dairy v. Kroger, 402 F.2d 968 (8th Cir. 1968) 
(concerning a claim of monopolization in the milk and dairy 
business); Robinson v. Magovern, 521 F. Supp. 842 (W.D. Pa. 1981) 
(addressing an antitrust action against a hospital); Cargill, Inc. 
v. Monfort of Colorado, Inc., 479 U.S. 104 (1986) (concerning a 
merger in the beef packing industry); Bailey v. Allgas, Inc., 284 
F.3d 1237 (11th Cir. 2002) (addressing an antitrust action arising 
from a price war between liquid propane gas competitors); Yoder 
Bros., Inc. v. California-Florida Plant Corp., 537 F.2d 1347 (5th 
Cir. 1976) (addressing antitrust claims arising from infringement of 
plant patents); H.L. Hayden Co. of New York, Inc., v. Siemens 
Medical Systems, Inc., 879 F.2d 1005 (2nd Cir. 1989) (addressing 
antitrust claims relating to distribution of dental x-ray 
equipment); Nifty Foods Corp. v. Great Atl. & Pac. Tea Co., 614 F.2d 
832 (2nd Cir. 1980) (concerning an antitrust suit arising from the 
substitution of a supplier of frozen waffles); U.S. v. ALCOA, 148 
F.2d 416 (2nd Cir. 1945) (concerning claims of monopolization of 
interstate and foreign commerce in the manufacture and sale of 
aluminum).
    \47\ Energy Information Administration, ``Assumptions to the 
Annual Energy Outlook 2006,'' Report : DOE/EIA-0554 (2006); 
James A. Espey & Molly Espey, ``Turning on the Lights: A Meta-
analysis of Residential Electricity Demand Elasticities,'' Journal 
of Agricultural and Applied Economics, 36:1, at 65-81 (April 2004).
---------------------------------------------------------------------------

    38. Southern asserts that the Final Rule's reliance on the 1984 
Merger Guidelines for use of the ``20 percent market share'' is 
incorrect. Section 4.134 of the 1984 Merger Guidelines states:

    Entry through the acquisition of a relatively small firm in the 
market may have a competitive effect comparable to new entry. Small 
firms frequently play peripheral roles in collusive interactions, 
and the particular advantages of the acquiring firm may convert a 
fringe firm into a significant factor in the market. The Department 
is unlikely to challenge a potential competition merger when the 
acquired firm has a market share of five percent or less. Other 
things being equal, the Department is increasingly likely to 
challenge a merger as the market share of the acquired firm 
increases above the threshold. The Department is likely to challenge 
any merger satisfying the other conditions in which the acquired 
firm has a market share of 20 percent of [sic] more.\48\
---------------------------------------------------------------------------

    \48\ U.S. Department of Justice Non-Horizontal Merger Guidelines 
sec. 4.134, originally issued June 14, 1984, as part of the U.S. 
Department of Justice Merger Guidelines, reprinted in Trade Reg. 
Rep. ] 13,103 (CCH 1988) (footnote omitted).


[[Page 25839]]


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

    39. Upon further review, the context discussed in this quote 
differs from the issue before us, and provides little guidance here. In 
the market-based rate context, we focus on whether the applicant has a 
20 percent market share as a conservative measure because of the 
electricity market's characteristics including inelastic demand and the 
need to balance the entire transmission grid in real-time.\49\ However, 
the Non-Horizontal Merger Guidelines provide that a firm with a 20 
percent share is unlikely to be a ``fringe'' firm and an insignificant 
factor in the market. This is the same reason that we use the 20 
percent threshold in our indicative screen: Firms with a 20 percent 
market share would be unlikely to hold a dominant position in the 
market.\50\
---------------------------------------------------------------------------

    \49\ A seller who has less than a 20 percent market share in a 
season will be considered to satisfy the market share analysis. AEP 
Power Marketing, Inc., 107 FERC ] 61,018, at P 102 (April 14 Order), 
order on reh'g, 108 FERC ] 61,026 (2004) (July 8 Order).
    \50\ See Id. P 104.
---------------------------------------------------------------------------

    40. We also reject Southern's argument that the Commission's 20 
percent threshold falls short when measured against the jurisprudence 
interpreting section 2 of the Sherman Act.\51\ Economic theory suggests 
that it may be possible, given the unique conditions in electricity 
markets, for sellers to exercise market power, using a much more 
limited withholding of supply, than industries listed in the cases 
relied upon by Southern.\52\ Moreover, in contrast to the cases cited, 
the Commission uses 20 percent as an indicative screen, not as a 
dispositive factor in determining whether market power exists. We have, 
as indicated, approved market-based rates for firms with market shares 
in excess of 20 percent.
---------------------------------------------------------------------------

    \51\ Southern Rehearing Request at 22-23.
    \52\ See supra n.46.
---------------------------------------------------------------------------

    41. We reject NASUCA's request that the Commission require sellers 
to treat capacity that is committed to long-term contracts that are 
indexed or linked to spot market prices as uncommitted capacity in 
calculating market share when screening for horizontal market power. As 
support, NASUCA cites a model that withdraws the capacity committed 
under the long-term contracts from the short-run market, and then 
concludes that the now reduced capacity traded in the spot market 
lowers the incentives for rival firms to deviate from any collusive 
behavior by reducing the number of firms in the market and their 
available capacity.\53\ Therefore, the model cited by NASUCA subtracts 
capacity committed under long-term contracts from the capacity 
available in the short-run market, just as we do in our analysis. 
Similarly, the Commission believes that once capacity is committed 
long-term, regardless of how that capacity is priced (e.g., whether 
linked to spot prices or not), the ability of the firm to use that 
capacity to exercise market power in the spot market is severely 
limited or non-existent. The ability to collude will be determined by 
the remaining uncommitted capacity in the spot market, not the capacity 
that is already committed under long-term contracts. Therefore, we 
conclude that it is appropriate to subtract capacity committed under 
long-term contracts when calculating a seller's uncommitted capacity 
for purposes of performing the indicative screens.
---------------------------------------------------------------------------

    \53\ ``If collective action is necessary for the exercise of 
market power, as the number of firms necessary to control a given 
percentage of total supply decreases, the difficulties and costs of 
reaching and enforcing an understanding with respect to the control 
of that supply might be reduced.'' U.S. Department of Justice and 
the Federal Trade Commission, Horizontal Merger Guidelines, section 
2.0, reprinted at 4 Trade Reg. Rep. (CCH) ] 13,104 (Issued April 2, 
1992, Revised April 8, 1998).
---------------------------------------------------------------------------

3. DPT Criteria
Final Rule
    42. In Order No. 697, the Commission announced that it would 
continue to use the DPT to make a definitive determination of whether a 
seller has market power and that it would continue to weigh both 
available economic capacity and economic capacity when analyzing market 
shares and Hirschman-Herfindahl Indices (HHI).\54\ The Commission chose 
to retain the HHI threshold of 2,500 for passing the DPT, and to retain 
the 20 percent market share threshold. Responding to arguments that if 
a 2,500 HHI threshold is retained, it should be used with a 15 percent 
market share because these are the criteria of the oil pipeline test 
from which the 2,500 HHI was derived, the Commission noted that it 
``had not seen cases where the HHI was over 2,500 and the seller's 
market share was between 15 and 20 percent, which would be the type of 
situation about which [commenters] are concerned.'' \55\
---------------------------------------------------------------------------

    \54\ Order No. 697 at P 13, 104, 106.
    \55\ Id. P 113.
---------------------------------------------------------------------------

Requests for Rehearing
    43. Montana Counsel argues that the Commission should clarify that 
capacity committed to a competitor's native load or otherwise 
unavailable on a firm basis should not be considered available to 
compete with the applicant's generation, and as such should not be 
included as available capacity in the DPT analysis. Montana Counsel 
states that in its order on PPL Montana's request for renewal of 
market-based rate authority, the Commission stated that it was ``not 
inconsistent with how DPTs have historically been conducted'' for PPL 
Montana to include as available competing generation capacity that was 
committed elsewhere.\56\ Montana Counsel contends that this is 
inappropriate insofar as generation committed to serve another 
utility's native load cannot be available to compete with the 
applicant's generati