FTC Comment Before the Federal Energy Regulatory Commission Concerning Market-Based Rates for Public Utilities

Before the
United States of America
Federal Energy Regulatory Commission
Market-Based Rates for Public Utilities 	) 	Docket No. RM04-7-000
Comment of the
Federal Trade Commission
July 16, 2004

1FERC, “Initiation of Rulemaking Proceeding on Market-Based Rates and Notice of
Technical Conference,” Docket No. RM04-7-000 at 1 (Apr. 14, 2004).
Before the
United States of America
Federal Energy Regulatory Commission
Market-Based Rates for Public Utilities 	) 	Docket No. RM04-7-000
Comment of the
Federal Trade Commission
I. 	Introduction and Summary
The Federal Trade Commission (FTC or Commission) appreciates this opportunity to
present its views concerning analytical methods for delineating markets and assessing market
power. Currently, the Federal Energy Regulatory Commission (FERC) uses a four-pronged test
to assess whether a wholesale electricity supplier has market power: (1) whether the supplier has
generation market power, (2) whether the supplier has transmission market power, (3) whether
the supplier can erect barriers to entry, and (4) whether there are concerns involving the supplier
that relate to affiliate abuse and/or reciprocal dealing. 1 If the answers to these inquiries are “no,”
the supplier is eligible to offer electricity for sale at market prices rather than at regulated rates.
Assuming economically sound assessments within each prong, FERC’s four-pronged test
will yield informative indications of likely supplier market power. FERC may wish, however, to
update the thresholds or screens that apply to each prong based on the significant experience
FERC has obtained in monitoring wholesale market operations. This comment suggests
appropriate thresholds or screens and, where applicable, methodologies to ensure sound
analytical determinations for the various prongs (for example, FERC should base its generation
market power analysis on the techniques and approaches outlined and discussed in the

2U.S. Dept. of Justice and Federal Trade Comm., Horizontal Merger Guidelines (Apr. 2,
1992, as revised Apr. 8, 1997) (Horizontal Merger Guidelines).
3See, e.g., Letter of the Federal Trade Commission to Thomas E. Bliley, Chairman,
House Committee on Commerce, on H.R. 2944, The Electricity Competition and Reliability Act
(Jan. 14, 2000), available at <http://www.ftc.gov/be/v000002.htm>. Market power on the part
of a seller is the ability profitably to maintain prices above competitive levels for a significant
period of time. Horizontal Merger Guidelines, § 0.1, adopted by FERC as the analytical
framework for use in evaluating the effects of electric utility mergers on market power. FERC,
Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act: Policy
Statement, Order No. 592 (issued Dec. 18, 1996). High generation concentration does not in
itself imply market power.
2
Department of Justice and Federal Trade Commission Horizontal Merger Guidelines2
).
The Commission has stated repeatedly that consumers benefit when markets operate
unburdened by substantial and durable market power.3 Accordingly, if market power exists in a
market for wholesale electric power, economically practicable policies that lessen this market
power by reducing a high level of generation concentration, expanding the geographic market,
lowering entry barriers, or increasing the price elasticity of demand are likely to enhance
consumer welfare.
We applaud FERC’s efforts to reevaluate its methodology for identifying market power
to ensure that its diagnoses of market power are based on sound economic principles. The FTC
and its staff have long supported FERC’s efforts to improve its market power screens for

4See, e.g., FTC Staff Comment on FERC Docket No. EL01-118-000 (Investigation of
Terms and Conditions of Public Utility Market-Based Rate Authorization; Order Establishing
Refund Effective Date and Proposing to Revise Market-Based Rate Authorization) (Jan. 7,
2002), available at <http://www.ftc.gov/be/v020005.htm>; FTC Comment on FERC Docket
Nos. EL01-118-000 and EL01-118-001 (Investigation of Terms and Conditions of Public Utility
Market-Based Rate Authorization) (Aug. 28, 2003) (FTC Market-Based Rate Authorization
Comment), available at <http://www.ftc.gov/be/v030014.pdf>.
5See, e.g., FTC Staff Comment on FERC Docket No. RM98-4-000 (Revised Filing
Requirements for Merger Applicants) (Sept. 11, 1998), available at
<http://www.ftc.gov/be/v980022.htm>.
6FTC Staff Report: Competition and Consumer Protection Perspectives on
Electric Power Regulatory Reform (July 2000) (FTC July 2000 Report), available at
<http://www.ftc.gov/be/v000009.htm> (this report compiles previous comments that FTC staff
had provided to various state and federal agencies); FTC Staff Report: Competition and
Consumer Protection Perspectives on Electric Power Regulatory Reform, Focus on Retail
Competition (Sept. 2001), available at <http://www.ftc.gov/reports/elec/electricityreport.pdf>.
3
granting market-based rates 4 and for other purposes.5
The FTC is an independent agency responsible for maintaining competition and
safeguarding the interests of consumers through enforcement of the antitrust and consumer
protection laws and through competition advocacy. In the electric power industry, the FTC often
analyzes regulatory or legislative proposals that may affect competition or the efficiency of
resource allocation and reviews proposed mergers involving electric and gas utility companies.
In the course of this work, as well as in antitrust research, investigations, and litigation, the
Commission applies established principles and recent developments in legal and economic
theory and empirical analysis to competition issues. As part of its competition advocacy
program, the FTC has issued two Staff Reports on electric power industry restructuring issues at
the wholesale and retail levels.6 The FTC and its staff have also filed numerous competition
advocacy comments on electricity restructuring efforts with FERC, the states, and international

7For a listing of comments, see <http://www.ftc.gov/be/advofile.htm>.
8FERC, Promoting Wholesale Competition Through Open Access Non-discriminatory
Transmission Services by Public Utilities and Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, Final Order, Order No. 888 (issued May 10, 1996); FERC, Open Access
Same-Time Information System (Formerly Real-Time Information Networks) and Standards of
Conduct, Final Order, Order No. 889 (issued May 10, 1996); FERC, Regional Transmission
Organizations, Final Rule, Order No. 2000 (issued Dec. 20, 1999).
9FERC, Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592 (issued Dec. 18, 1996).
10 FERC, Standard Market Design, Docket No. RM01-12-000, Notice of Proposed
Rulemaking (issued Aug. 12, 2002).
11 FERC, Standardization of Generator Interconnection Agreements and Procedures, Final
Rule, Order No. 2003 (issued July 24, 2003).
12 FERC, Standards of Conduct for Transmission Providers, Final Rule, Order No. 2004
(issued Nov. 25, 2003).
4
competition organizations.7
II. 	FERC Has Gained Substantial Experience Monitoring Wholesale Electricity
Markets and May Wish to Apply this Learning to the Four-Pronged Market Power
Inquiry
In the 15 years since FERC adopted the four-pronged test, wholesale market operations
have evolved and FERC has gained significant experience in monitoring electric power markets.
To correspond to these changing circumstances, FERC has undertaken several regulatory
initiatives to ensure that the exercise of market power – in generation or transmission – does not
hinder efficient operation of wholesale electricity markets by increasing prices or reducing
output. These efforts include Orders 888, 889, and 2000, which require nondiscriminatory
transmission access, 8 as well as the revised merger policy statement, 9 standard market design
proposals,10 large generation interconnection standards,11 revised codes of conduct,12 and

13 FERC, Solicitation Processes For Public Utilities, Docket No. PL04-6-000,
Notice of Technical Conference (May 11, 2004).
14 FERC, Acquisition and Disposition of Merchant Generation Assets by Public Utilities,
Docket No. PL04-9-000, Notice of Technical Conference (May 11, 2004).
15 FERC, AEP Power Marketing, Inc., et al., Docket Nos. ER96-2496-106, et al., Order on
Rehearing and Modifying Interim Generation Market Power Analysis and Mitigation Policy
(issued Apr. 14, 2004) (FERC Interim Generation Market Power Order).
16 To assess the risk of coordinated interaction, FERC should use a screen based on a
concentration measure such as the Herfindahl-Hirschman Index (HHI). The HHI is calculated
by summing the squares of the individual market shares of all the participants in a properly
5
proposals governing the solicitation processes utilities use to acquire wholesale supply13 and the
acquisition and disposition of merchant generation assets. 14
Through these initiatives, FERC has begun to identify best practices or best institutions
that relate to the four prongs. FERC may want to capitalize on this progress by revising screens
or thresholds for each of the four prongs that public utilities must satisfy or comply with in order
to obtain authority to charge market-based rates. Of course, FERC also may want to specify the
types of evidence that it may consider if an applicant does not meet the initial thresholds or
screens.
A. 	FERC May Want to Update Its Methodology for Delineating Relevant
Markets to Improve Its Generation Market Power Assessments
Recently FERC has adopted “interim” standards for assessing whether an applicant for
market-based rates has generation market power.15 The revisions include two indicative screens
for assessing market power – one screen that assesses possible exercises of unilateral market
power and another that focuses on the risk of coordinated interaction. FERC’s inclusion of a
screen that relates to the risk of coordinated interaction is a sound addition to its generation
market power analysis.16

delineated (product and geographic) market. The HHI reflects the distribution and relative
magnitude of market shares of the firms in the relevant market, and gives proportionately greater
weight to the market shares of the larger firms, in accord with their relative importance in
competitive interactions. See Horizontal Merger Guidelines, § 1.5.
17 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 non-requirement sales. If an applicant’s
uncommitted capacity is equal to or greater than the net uncommitted supply in a market, then
the applicant fails the pivotal supplier analysis, which creates a rebuttable presumption of market
power. The market share analysis adopts an initial threshold of 20 percent. That is, a supplier
with less than 20 percent of uncommitted capacity in all seasons will be considered to satisfy the
market share analysis. FERC Interim Generation Market Power Order at §§ VI.B.e and VI.B.f.
6
We also commend FERC for limiting the use of its market power screens to establish
only a rebuttable presumption about generation market power. This approach provides an
opportunity for a firm that fails these screens to demonstrate through more refined techniques
that it does not have generation market power, or for intervenors to demonstrate that a firm has
generation market power even if it passed the screens. This approach should help to reduce
errors in deciding whether to grant market-based rate authority and should encourage the
development of more refined screens.
Before making these “interim” screens final, however, FERC may wish to modify its
approach to delineating relevant product and geographic markets. The screens assess market
power under the pivotal supplier analysis or market share analysis based on uncommitted
capacity at the times of annual and seasonal peak demands.17 These screens do not take account
of all time periods in which market power – and significant consumer harm from exercises of
market power – may be most likely. For example, periods of transmission congestion, when
localized market power may occur, may not coincide with either annual or seasonal demand
peaks. Similarly, dry weather, which reduces the availability of hydroelectric power, tends to

18 Horizontal Merger Guidelines, § 1.0.
7
occur in multi-year cycles. As a result, variations in market power due to variations in
hydrological conditions are unlikely to be well represented by seasonal measures of capacity.
Thus, even apart from the issues of properly defining the relevant markets discussed below,
FERC’s methodology to assess market power may not accurately reflect competitive dynamics
in wholesale energy markets.
1. 	FERC Should Assess Market Power Within Relevant Product
Markets
Before FERC can evaluate whether an applicant is likely to have market power, it must
accurately delineate relevant product markets in which to make these evaluations. The agency
should delineate product markets using the hypothetical monopolist test of the Horizontal
Merger Guidelines: a relevant product market is a product or group of products such that a
hypothetical profit-maximizing firm would impose at least a "small but significant and
nontransitory" increase in price.18 This analysis involves determining whether the pricing in a
hypothesized product market is so constrained by competition from products outside that
proposed market that additional products should be included in the same market.
Electricity product markets are delineated for different seasons and times of the day
because supply and demand conditions in energy markets vary over time and cross-price
elasticities of supply and demand are generally very low between different time periods.
Typically, dispatchable gas-fired generating units cannot supply energy at the relatively low
prices that prevail under competitive conditions during off-peak hours, and hence these
generating units should not be included in computing off-peak market shares. By contrast,

19See FTC Market-Based Rate Authorization Comment, supra note 4, at 6-7.
20See Ronald J. Binz and Mark W. Frankena, “Addressing Market Power, The Next Step
in Electric Restructuring,” Competition Policy Institute, at 37 (1998).
21 If the geographic market is delineated too broadly, applicants with market power in
narrower relevant markets may pass the screen (Type II error). If the geographic market is
8
dispatchable gas-fired generating units are included in markets for on-peak energy.
Market power screens should accurately gauge whether suppliers are likely to have
market power in the products for which they seek approval of market-based rates. In addition to
product markets for electric energy based on the season and the time of day at which the
electricity is supplied, there are markets for certain other electric power products. In regions
where utilities have obligations to maintain generating capacity reserves, there may be markets
for generating capacity rights. There may be markets for such products as spinning reserves and
voltage control that FERC may wish to examine.
2. 	FERC Should Use Economically Sound Methods to Delineate
Relevant Geographic Markets
Accurate delineation of geographic markets is critical to assessing whether an applicant
has market power.19 Identification of geographic markets for wholesale electric power is often
difficult because competition depends on a variety of factors, including: (i) capacities and
variable costs of available generating units; (ii) electricity demand by end-users; (iii) contractual
and legal obligations of generators that limit the amounts of energy that can be sold in wholesale
markets; (iv) transmission charges and congestion; and (v) utility practices regarding access to
the transmission system. 20 The geographic market used by FERC in both of its indicative
screens – the control area – will be accurate only by coincidence because control areas are
determined administratively. 21 We suggest that FERC, as part of its long-term solution for

delineated too narrowly, applicants without market power may fail the screen (Type I error).
However, an excessively broad market also may result in Type I errors, while an excessively
narrow market also may result in Type II errors, such as when a supplier has a larger share in a
broader area than in a narrower one. See Mark W. Frankena, “Analyzing Market Power Using
Appendix A of FERC’s Merger Policy Statement: Rationale, Reliability, and Results,” CCH
Power and Telecom Law, at 29-34 (Jan./Feb. 1998).
22See John R. Morris, “Finding Market Power in Electric Power Markets,” 7 Int’l J. Econ.
Bus. 167 (2000); Mark W. Frankena and John R. Morris, “Competition Simulation Models Enter
the World of Energy Litigation,” 3 Power 8 (Winter 1998).
23 Electric energy simulation models have better information about cost conditions than
the Bertrand simulation models that have been used to investigate market power in various other
industries. Data on variable costs of generating electric energy are publicly available for use in
simulation models, while in Bertrand models costs are imputed from estimated demand curves
using an assumption that firms compete only on the basis of price. If the estimates or the
assumptions are wrong, then this inversion will produce estimated costs that are dramatically
different from real costs. This may make the predictions of Bertrand models highly misleading.
Also, the demand side of the electric energy markets in representative hours is relatively well
known and simple. Consumers often do not face varying prices for the energy they consume, so
consumer demand is not sensitive to price and varies in a reasonably predictable manner
according to the time of day and season.
Moreover, in the relevant time periods, wholesale electric energy suppliers choose only
how much to produce or what prices to charge, and this behavior is relatively easy to capture in a
model. The firms in Bertrand models are assumed to compete only by setting price, when in
reality they may be competing in a host of other dimensions that are not captured in the model,
such as product, placement, and promotion (which, along with price, are called the “Four P’s of
9
addressing market power, undertake computer simulation analysis of the electrical system to
delineate relevant geographic markets more accurately.
A number of simulation models of the wholesale electric power industry have been used
in administrative litigation.22 It is possible to build such models because of the public
availability of detailed data on many characteristics of individual electric generating units,
including locations, variable costs, and capacities; on the transmission grid, including prices and
capacities among different areas of the country; and on hourly demand for electric power in each
area of the country.23

Marketing”). See Philip Kotler, Marketing Management Prentice-Hall, 11th ed. 2002).
24 Horizontal Merger Guidelines, § 1.21.
25 Because electric power cannot generally be inventoried, each time period is likely to
represent a separate product market, and relevant geographic markets may differ among these
time periods.
10
An appropriate computer simulation model can be used to delineate relevant geographic
markets based on the hypothetical monopolist methodology. The Horizontal Merger Guidelines
describe a geographic market (absent price discrimination) as a region in which a hypothetical
monopolist – i.e., the only present and future producer of the relevant product at locations in that
region – would profitably impose at least a small but significant and nontransitory increase in
price, holding constant the terms of sale for all products produced elsewhere.24 In the absence of
transmission constraints, it is likely to be difficult to delineate appropriate geographic markets
(particularly for the wide variety of demand and supply conditions often experienced in the
electricity industry25 ) without using a computer simulation model.
Simulation models also can be used for other purposes. These models can help predict
the effects of many types of changes in the industry – for example, a change in demand for
electric energy in one area, in transmission capacity, or in natural gas prices. Simulation models
can be used to explore a merger’s potential to produce certain types of competitive effects -- for
example, whether the merger would increase the incentives of the acquiring company to
withhold output of electric energy in order to raise market prices and its own profits. Computer
simulation models are helpful because they allow one to take into consideration whether other
firms would have the incentive and ability to expand output sufficiently to make such a price
increase unprofitable. They also can be used to evaluate potential remedies for market power.

26See, e.g., Scott M. Harvey and William W. Hogan, “Market Power and Market
Simulations” (July 16, 2002), available at <http://ksghome.harvard.edu/~.whogan.cbg.Ksg/
H-H_Market_Power&Simulations_071602.pdf>.
27 The U.S. Department of Energy expended substantial resources to access an existing
commercial model and to use its own in-house model to evaluate the effects of FERC’s standard
market design proposals within a relatively short period. See U.S. Department of Energy,
“Report to Congress: Impacts of the Federal Energy Regulatory Commission’s Proposal for
Standard Market Design” (Apr. 30, 2003). Our experience with other types of simulation models
suggests that, if FERC used such models on an ongoing basis, the incremental cost and time
involved in review of market-based rate applications would decrease over time as its staff gained
experience and expertise.
28 “Functional” separation refers to behavioral rules, such as FERC Order No. 888, that
require vertically integrated utilities to grant open access and equal treatment to their generation
competitors. “Operational” separation, such as FERC Order No. 2000, provides that dispatch of
generating capacity and/or the operation of the transmission grid would be controlled by an
independent entity.
11
Notwithstanding their value, computer simulation models are only one of the tools used
to analyze market power in the electric power industry. The results from simulation models may
be sensitive to the specifications of the models. 26 Moreover, resources are necessary to develop
a model and/or improve an existing one, to ensure that it is reliable, and to keep it up-to-date.27
B. 	Potential Elements of the Transmission Market Power Screen
For nearly a decade, FERC has been trying systematically to rid wholesale electricity
markets of discrimination by public utilities in the provision of transmission services. In 1996,
FERC ordered public utilities to provide open access to their transmission lines on the same
basis on which they provide access to themselves. FERC implemented a functional separation,
rather than operational unbundling, because the latter was potentially more intrusive and costly.28
In Order 2000, FERC recognized that the behavioral rules in Orders 888 and 889 were not
sufficient to remedy discrimination because they left in place incentives to discriminate in

29 See FERC Order 2000 at 32-70 (discussing transmission-related impediments to a
competitive wholesale electric market under the open access tariffs required by Orders 888 and
889). The FTC staff had warned in 1995 that operational unbundling would likely be more
effective than functional unbundling and less costly than industry-wide divestiture. FERC’s plan
for functional unbundling of power generation from transmission services “would leave in place
the incentive and the opportunity for some utilities to exercise market power in the regulated
system. Preventing them from doing so by enforcing regulations to control their behavior may
prove difficult. The problem would be most effectively prevented by completely separating
ownership and control of generation from transmission. This separation would remove both the
incentive and the opportunity to exercise market power, by eliminating the utilities’ ability to
discriminate in favor of their own generation operations. The additional benefits of full
divestiture may be outweighed, however, by the costs and difficulties of implementing it
industry-wide. It may be sufficient to require ‘operational unbundling,’ in which the dispatch of
generating capacity and/or the operation of the transmission grid would be controlled by an
independent entity. Operational unbundling could prevent discrimination and achieve the
competitive benefits of open access more effectively and efficiently than would an attempt to
mandate, regulate, and monitor access.” Comment of the Staff of the Bureau of Economics of
the Federal Trade Commission, In the Matter of Promoting Wholesale Competition through
Open Access Non-discriminatory Transmission Services by Public Utilities, Recovery of
Stranded Costs by Public Utilities and Transmitting Utilities, FERC Docket Nos. RM95-8-000
and RM94-7-001, at 2 (Aug. 7, 1995), available at <http://www.ftc.gov/be/v950008.htm>.
12
transmission access. Detection and documentation of discrimination were difficult.29
In Order 2000, FERC encouraged public utilities to join Regional Transmission
Organizations (RTOs) and thereby reduce the ability of a vertically integrated public utility to
discriminate in favor of its own generation services. Some public utilities have not joined a
FERC-approved RTO, and not all approved RTOs are fully operational. Public utilities in these
areas may have the incentive and ability to engage in transmission discrimination that favors
their own generation assets. A supplier that owns transmission assets but is not part of an
approved RTO or Independent System Operator (ISO) may be in a position to exercise
transmission market power. Moreover, the applicant may be able to engage in improper
information sharing and cross-subsidization.
In developing the transmission market power screen, FERC may wish to utilize the

30 Incentives to discriminate stemming from contractual relationships, however, may also
warrant analysis. An example may be a transmission utility that has a marketing affiliate with
long-term power purchase contracts in the same area.
31 The Horizontal Merger Guidelines (§ 3.0) define ease of entry in the merger context as
entry that “is so easy that market participants, after the merger, either collectively or unilaterally
could not profitably maintain a price increase above premerger levels. Such entry likely will
deter an anticompetitive merger in its incipiency, or deter or counteract the competitive effects of
concern.”
13
insights from its experience with Orders 888, 889, and 2000. Accordingly, a utility that has
joined an approved and operating RTO or ISO or a firm that has divested its generation should
pass the transmission market power screen.30 RTOs and ISOs involve operational unbundling of
transmission from generation, a type of structural remedy that reduces or eliminates incentives
and the ability to discriminate. Under RTO arrangements, the grid operator is independent and
has no financial interest in generation – and hence, has no incentive to discriminate. The
transmission owner may continue to have an incentive to discriminate, but it no longer has the
ability to do so. Given FERC’s findings in Order 2000 regarding the importance and prevalence
of anticompetitive transmission discrimination and the difficulties of detecting it, applicants
would bear the burden of demonstrating that they do not have the ability and incentive to
exercise transmission market power or that transmission market power could be readily detected
if it were exercised.
C. 	Potential Elements of the Screen for Creation of Entry Barriers
In wholesale electricity markets, a supplier would not have market power in generation
and transmission if entry into both levels were easy -- that is, timely, likely, and sufficient. 31
Because generation and transmission can be substitute avenues for entry, with one more
economically efficient than the other in specific circumstances, an assessment of overall entry

14
conditions by FERC should consider both generation and transmission. FERC’s focus for the
entry barriers prong, however, is more specific: FERC focuses on the creation of entry barriers
by applicants for market-based rates.
In refining the application of this screen, FERC may wish to consider its recent
experience concerning interconnection rules and transmission expansions by RTOs. FERC’s
interconnection rules derived in part from its concern that vertically integrated utilities may have
incentives and the ability to protect their generation assets from competition by delaying or
increasing the costs for independent generators that wish to connect to the transmission system.
Connection to the transmission system is a necessary element for generation entry that is not on
the customer’s site, and compliance with the interconnection rules provides one indication that
an applicant is not creating barriers to generation entry.
Similarly, FERC has developed procedures in RTOs to identify and undertake
economically efficient transmission expansion projects, although significant problems remain in
achieving timely and economically efficient grid expansions. FERC’s grid expansion procedures
are motivated in part by concern that vertically integrated utilities may have incentives to
postpone or avoid transmission expansions that would facilitate access for new generation
entrants that would compete with the utilities’ generation assets. A firm that is a member of an
RTO – and therefore follows the transmission expansion processes of the RTO – has a more
limited ability to delay or avoid transmission expansions that facilitate generation entry. RTO
members should be able to pass this aspect of the screen for creating entry barriers. A utility not
in compliance with the interconnection rules or not a member of an operating RTO or ISO would
bear the burden of proof for these aspects of FERC’s entry barriers analysis.

32See Comment of the FTC on FERC Docket Nos. PL04-6-000 and PL04-9-000
(Solicitation Processes for Public Utilities Acquisition and Disposition of Merchant Generation
Assets by Public Utilities) (filed July 14, 2004).
33Id. at 12-13. The FTC has experience in both antitrust law enforcement and consumer
protection regarding the use of independent third parties to avoid discriminatory decisions by
affiliates. For example, the settlement of the DTE/MichCon merger case provides for an
independent third-party evaluation of the prices and services offered by the electric utility’s (i.e.,
DTE) natural gas distribution affiliate, MichCon, to an entrant that shares the natural gas
distribution system with MichCon. This entrant competes with DTE for customers choosing
between electricity and natural gas, including electricity customers considering switching to on-
site electric power generation fueled by natural gas.
15
D. 	Potential Elements of the Affiliate Abuse Screen
The recent FTC comment on utilities’ solicitation processes discusses recent FERC
concerns about evasion of rate regulation, discrimination, and cross-subsidization in transactions
between utilities and their unregulated affiliates.32 FERC’s existing policies in these areas may
be modified as the result of this recent review. One possible insight from FERC’s review of
these policies relates to the potential role of independent third parties in assessing the market
value of transactions between a utility and its affiliates. 33 FERC may want to include compliance
with any new policies in this area as a prerequisite to passing the affiliate abuse screen. A utility
with a record of violations of these policies would bear the burden of proof that it passes the
affiliate abuse prong.
III. 	Conclusion
FERC has gained substantial experience in monitoring wholesale market operations in
the 15 years since it introduced its four-pronged test to assess whether a supplier may sell its
supply at market prices. Assuming economically sound assessments within each prong, the four-
pronged test will yield accurate determinations of supplier market power. FERC may want to

16
update the thresholds or screens that apply to each prong based on FERC’s significant
experience in monitoring wholesale market operations. FERC also may want to specify
evidence that it would consider to cross the threshold or rebut the presumption adopted for each
relevant prong.