RM04-7-000 Technical Conference comments

UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
____________________________________
)
Acquisition And Disposition Of
)
Merchant Generation Assets
)
By Public Utilities
)
)
Solicitation Processes For
)
Public Utilities
)
)
Market-Based Rates For Public
)
Utilities
)
____________________________________)

Docket No. PL04-9-000
Docket No. PL04-6-000

Docket No. RM04-7-000

POST-TECHNICAL COMMENTS OF INTERGEN SERVICES, INC.
The Federal Energy Regulatory Commission (“Commission”) recently
convened three separate Technical Conferences, addressing Market-Based Rates for
Public Utilities (Docket No. RM04-7-000), Solicitation Processes for Public Utilities
(Docket No. PL04-6-000), and Acquisition and Disposition of Merchant Generation
Assets by Public Utilities (Docket No. PL04-9-000). As the Agenda for each Technical
Conference indicated, recent changes in the market make the Commission’s market
power determinations of critical importance to assuring that a grant of market-based
rates, or approval of proposed mergers or acquisitions under Section 203 of the Federal
Power Act (“FPA”), will not allow applicants to exercise either horizontal or vertical
market power. InterGen Services, Inc. (“InterGen”) submits the following comments,
urging the Commission to condition its approval of proposed transactions or
applications for market-based rates on the applicant’s adopting, where appropriate,
structural mitigation measures to ensure that it cannot foreclose competitors and

1788634 v3; 12C4@03!.DOC

thereby stifle competition. 1 The ability of an applicant to foreclose competitors from the
wholesale market – whether through the applicant’s continued control over
transmission or through its control over wholesale purchases – can have a lasting
detrimental impact on the development of competitive wholesale markets in the
absence of adequate mitigation.
Whatever the causes of foreclosure, consumers in certain regions of the
country clearly suffer from its impacts. Most striking are areas of the country where
brand new, efficient, environmentally top-notch generation units sit idle while plants
that burn as much as twice the fuel and overly pollute the environment are dispatched
by incumbent utilities who have refused to open their markets to competition. Even
more striking is the fact that utilities running these plants charge their consumers for
their inefficiency, through fuel adjustment clauses that have increased annual power
bills of electricity consumers.
These circumstances are indicative of uncompetitive markets, and whatever
specific market screens are adopted should confirm these real-world scenarios. Thus, in
circumstances where the exercise of market power clearly exists, the burden should be
placed on Commission applicants – be it for a market-based-rate authorization or
approval of an acquisition or merger – to (1) prove that there is some legitimate
reliability or other compelling reason to explain the uneconomic dispatch of generation;

These Comments are timely filed pursuant to the Commission’s Notice Inviting
Comments, issued in each of Docket Nos. PL04-6-000 and PL04-9-000. InterGen
requests leave to file these comments one day out of time in Docket No. RM04-7-000.
InterGen has prepared comments in all three interrelated dockets on a consolidated
basis in an effort to conserve resources and to streamline the Commission’s
consideration of such comments. Thus, InterGen believes that good cause exists for the
Commission to grant limited waiver of the filing requirements with respect to Docket
No. RM04-7-000 deadline.
1

2
1788634 v3; 12C4@03!.DOC

or (2) take appropriate remedial action, such as immediately joining an RTO with a
working market and viable transmission options or taking other measures, e.g.,
instituting a rational competitive procurement process and/or economic dispatch.
Importantly, such actions must be taken before Commission approval is granted, not
after.
Finally, InterGen cannot overstate the need for the Commission to act now.
Many of the hardships and financial crises facing the industry are directly attributable
to the cumulative impact of unmitigated market power. All this industry requires to
thrive is a climate where rational economic decisions are made. Neither InterGen, nor
any other reputable market participant, is asking for a subsidy, but simply the
opportunity to compete on a fair basis. In the comments that follow, InterGen will
address some specific issues.
I.

“Generation Market Power” Screens Should not Exclude Capacity Used to
Serve Native Load Obligations
As the first of its four prongs of analysis in a market-based rate proceeding,

the Commission seeks to identify whether a firm is able to exercise “generation market
power” by applying two indicative screens, a “pivotal supplier screen” and an
“uncommitted market share” screen. 2 Both of these screens effectively measure an
applicant’s ability to exercise horizontal market power. Moreover, as the Commission
recognizes, the pivotal supplier screen is directed at testing whether an applicant has
the ability to unilaterally exercise horizontal market power. 3 By contrast, the
Commission intends its market share screen to be an indicator of overall market

2

AEP Marketing, Inc., et al., 107 FERC ¶ 61, 018, at P 71 (2004).

3

Id., at PP 72, 100-01.
3

1788634 v3; 12C4@03!.DOC

“dominance,” i.e., a test not only for unilateral market power, but also for the ability to
engage in coordinated behavior. 4
A test for overall market dominance is rendered meaningless if native load
obligation is subtracted in computing market share. Other commenters in the SMA
proceedings have noted the potential problems associated with eliminating an
applicant’s native load obligation from the indicative screens, and InterGen will not
reiterate those comments here, despite their continued relevance. 5 However, in the
context of the Commission’s current proposal, InterGen wishes to highlight certain key
weaknesses of a screen in which even a portion of an applicant’s native load is
subtracted from market share.
The “indicative screens” defined by the Commission in its April 14, 2004
Order are inconsistent with the way in which relevant markets are defined in the
Commission’s Merger Policy Statement. In the Commission’s Merger Policy Statement,
the Commission identifies several different ways in which to measure a supplier’s
ability to supply a particular product to the market, without limiting the discussion to a
suppliers’ capacity excluding its native load obligation. In fact, the Commission states
that “economic capacity” (including an applicant’s native load obligation) is “the most
important of the measures.” 6 This is also consistent with the DOJ/FTC Horizontal
Merger Guidelines, which specify that the capacity of a vertically integrated firm, even
if it is used to supply the firms’ own needs, should be included in the definition of a

4

Id., at P 72.

5

Id., at PP 89-90.

Inquiry Concerning the Commission’s Merger Policy Under the Federal Power Act: Policy
Statement, Order No. 592, Stats. & Regs. ¶ 31,044 at 30,132 (1996) (“Merger Policy
Statement”), order on reconsideration, 79 FERC ¶ 61,321 (1997).
6

4
1788634 v3; 12C4@03!.DOC

relevant market. 7 It is one thing for the Commission to advance an analytical procedure
to address a narrowly defined question of potential conduct, such as an applicant’s
ability to engage in a short-term physical withholding strategy, but it is quite another
for the Commission to advance an alternative way of defining a market that is in
conflict with the Merger Policy Statement.
In addition, excluding native load obligations will not only fail to capture
companies that are dominant in their market, it will also fail to identify the companies
which are most capable of exercising vertical market power by refusing to purchase at
wholesale to meet native load obligations even when that power is cheaper. This
market power allows a company to leverage its monopoly over retail service to exercise
market foreclosure and screens which exclude native load will ignore this reality.
II.

Market Foreclosure through the Exercise of Vertical Market Power
During the technical conferences, representatives of certain interest groups

cautioned against the Commission adopting policies that would unduly interfere with a
utility’s resource options to meet its load obligations. 8 Other comments raised the
specter that the imposition of limitations on a utility’s ability to acquire distressed assets
would simply further devalue those assets. 9 If this were to occur, such concerns might
7

See Merger Guidelines, Section 1.31, p. 11.

Concerns about limiting a utility’s resource options are misplaced. First, the purpose
of these proceedings, collectively, is to consider the market power implications of the
Commission’s policies relating to specific types of jurisdictional transactions. Nothing
the Commission does will compromise the legitimate development of resource
portfolios. In any event, it is not unreasonable for the Commission to adopt procompetitive policies the results of which encourage utilities to implement more efficient
resource procurement strategies.
8

These concerns are similarly misplaced to the extent they presume that acquired assets
became distressed through operation of competitive markets, or that purchases by
utilities take place in a competitive market. If entities are prevented from exercising
market power to strand otherwise competitive generation, then many of the assets
9

(footnote continued)

5
1788634 v3; 12C4@03!.DOC

merit consideration, but the Commission’s primary focus in granting requests to sell
power at market-based rates, or in approving individual Section 203 applications
should not be on whether a particular transaction will enhance shareholder value or
result in a low-cost resource option for a particular set of customers. Rather, the
threshold inquiry should be on whether the transaction is attributable to the exercise of
market power, or otherwise could facilitate a future exercise of market power and is
consistent with the public interest, taking into account its competitive implications. Put
simply, did the proposed transaction result from the applicant having used its market
power to foreclose the wholesale market to competition, or will it increase the ability or
incentive of the applicant to engage in such foreclosure in the future.
In assessing market foreclosure, the Commission should consider all forms of
vertical market power, whether exercised through a market participant’s control over
transmission, its control over other necessary inputs (such as fuel), or its control over
wholesale purchases (monopsony power). The Commission’s procedure for assessing
whether a transaction increases horizontal market power is well-established and
consistent with the DOJ/FTC Horizontal Merger Guidelines. By contrast, the
Commission’s procedures for assessing – and remedying—the exercise of vertical
market power are in much greater need of clarification and revision, given the specific
characteristics of current wholesale electricity markets.
As explained below, the Commission has long rec ognized the harm to
competition due to vertical market foreclosure in both a merger and market-based rate
context, and historically has relied on the Open Access Transmission Tariff (“OATT”)

proposed to be acquired likely would not have become distressed in the first instance,
thereby obviating concerns regarding further devaluation of such assets.
6
1788634 v3; 12C4@03!.DOC

for the needed mitigation. For too long, however, the Commission has allowed
transactions to proceed in good faith reliance upon, initially, OATT filings, and more
recently upon promises to join a RTO. More recently, the Commission has deemed
agreements to have certain market actions overseen by an independent monitor to be
sufficient mitigation pending the applicants joining a RTO. Experience has shown,
however, that the Commission has placed undue reliance upon these behavior-based
mitigation measures, because they are entirely ineffective remedies for market
foreclosure. In large parts of the country, there are no market structures to prevent
foreclosure. As a result, competitive markets have not materialized and thousands of
MWs of new, clean, efficient and cost-competitive generation sit largely idle, having
been foreclosed from the market by owners of older, less-environmentally friendly, and
higher cost generation.
The incentive of such owners to engage in activities that devalue the assets of
their competitors is clear. Indeed, given that efficient, low heat-rate units sit idle, while
some load serving entities routinely run their own inefficient, high heat-rate plants that
are located within the same control area, it should not be surprising that hundreds of
millions of dollars having nothing to due with increases in natural gas prices are
flowing through fuel adjustment clauses to ultimate consumers. And while some like to
argue that independent power producers made bad decisions building plants where
there was a “surplus” of generation, certainly, all else being equal, consumers would
benefit if wholesale market participants obtained power from plants with relatively low
fuel costs. Yet, due to market foreclosure, consumers in many service areas ultimately
pay the price for the uneconomic dispatch of generation that would be considered
“surplus” in a competitive environment. Entities engaged in such foreclosure activity

7
1788634 v3; 12C4@03!.DOC

should not be allowed to use Commission-approved transactions under Section 203 and
205 of the FPA to reap the benefits of, and then to further augment their market power
by utilizing such a strategy.
Accordingly, the Commission should take a pragmatic approach to
applications that are the product of, or facilitate, market foreclosure and adopt
structural measures to mitigate that foreclosure before an application is approved. If a
load serving entity is not presently operating within a fully-functioning RTO (e.g. a
PJM-style market structure), the rebuttable presumption should be that any behavioralbased mitigation or after-the-fact market monitoring (even if performed by an
independent body) will not effectively detect or prevent such entity from foreclosing its
competitors. Consequently, Commission approval of proposed transactions must either
be deferred until appropriate market structures in fact exist (a less than satisfactory
approach given the already over-extended transition period to competitive wholesale
markets), or alternatively, practical mitigation measures must be imposed as a condition
to receiving any Commission approval. Such measures should include a requirement to
economically dispatch competitive generation within a control area or relevant market,
pursuant to some form of competitive solicitation process. The parameters of the
mitigation would depend upon the specific s of the market. In any case, an economic
dispatch requirement would prevent a market participant from foreclosing the
wholesale market to competition by dispatching its own higher cost generation, despite
the availability of abundant lower cost generation from competing suppliers. A PJMstyle RTO simply would not accommodate such market foreclosure, and interim
structural measures are critically required in the absence of such fully-functioning
RTOs.

8
1788634 v3; 12C4@03!.DOC

III.

The Commission’s Current Analysis
Because of the detrimental effects vertical market power can have on

competition, the Commission requires that vertical market power mitigation be in place
before a merger is consummated and as a condition of its approving a request for
market-based rates. 10 Unfortunately, as recent transactions make clear, the measures
the Commission has looked to in the past to provide that mitigation have not proven
effective.
The Commission’s reasonable expectations that its policies would lead to the
development of organized, transparent wholesale markets have not borne true, and
many merchant generators, that made investments in the expectation of such markets
materializing, continue to falter and cannot withstand further delays in the
implementation of structural mitigation. In Order No. 2000, the Commission itself
concluded that its prior reliance on the existence of the OATT as mitigation had not
provided effective mitigation. The Commission reached this conclusion based on its
finding that the OATT did not change the incentives of the vertically-integrated utilities
to favor their own generation. As a result, after Order No. 2000, the Commission began
to condition mergers and facility acquisitions on membership in an RTO and on interim
mitigation which attempted to put in place certain key elements of an RTO. 11 Now, the
Commission is at a similar crossroads, as the promise of RTOs has, in certain areas of
the country, given way to the resurgence of the vertically integrated utility model. The
current resurgence has, in certain regions of the country, been undertaken on the backs

Merger Policy Statement at 30,136; American Electric Power Co. and Central and South
West Corp., 90 FERC ¶ 61,242 at 61,788 (2000) (“AEP”); Ohio Edison Co., et al., 85 FERC
¶ 61,203 at 61,845 (1998).
10

11

AEP at 61,789.
9

1788634 v3; 12C4@03!.DOC

of merchant developers and, ultimately, at the expense of consumers who will suffer
from the long-term consequences of stifling wholesale competition.
IV.

Signs Evidencing The Exercise Of Vertical Market Power
In analyzing the relationship between functioning RTOs and vertical market

power, the Commission should note the areas of the country where vertically integrated
utilities are proposing to acquire distressed assets or affiliated generation. Those
transactions are occurring in areas where an RTO is not in place or, if in place, not fully
functioning. 12 Equally telling, despite the fact that many of the enterprises with
“distressed assets” also have assets in regions of the country with RTOs in place, for the
most part, the vertically integrated utilities in those regions are not clamoring to
purchase those assets. 13
The reason for this distinction is simple. Absent fully-functioning RTOs with
well structured markets, an entity can exercise vertical market power either by
foreclosing competitors’ access to the transmission needed to reach wholesale markets,
or by foreclosing suppliers from the market itself by refusing to purchase lower-cost

See American Electric Power Company and Central and Southwest Corporation, 90 FERC
¶ 61,242 (2000); Oklahoma Gas and Electric Company and McClain, Docket No. EC03-131000; In the Matter of the Application of Arizona Public Service Company for a Hearing to
Determine the Fair Value of the Utility Property of the Company for Ratemaking Purposes, to
Fix a Just and Reasonable Rate of Return Thereon, To Approve Rate Schedules Designed to
Develop such Return, and For Approval of Purchased Power Contract, Docket No. E-01345A03-0437 (“APS Rate Proceeding”); and Georgia Power Company’s Application for
Certification of Southern Power’s McIntosh Purchase Power Agreement and Savannah Electric
and Power Company’s Application for the Certification of Southern Power’s McIntosh Purchase
Power Agreement, Docket No. 15392-U and Docket No. 15393-U (collectively “Georgia
Power Affiliate Proceeding”.)
12

For the most part, “distressed assets” in RTO regions are part of a broader portfolio of
assets, including assets in non-RTO regions.
13

10
1788634 v3; 12C4@03!.DOC

competing generation. 14 Thus, vertically integrated utilities in these regions have both
the opportunity and the incentive to acquire distressed assets to further foreclose the
market in advance of an RTO. Conversely, when similar assets are available in regions
with an RTO, they are not generally acquired by vertically integrated utilities, because
in a competitive market regime, there is less incentive for a load serving entity’s
outright ownership of such assets.
In analyzing how vertical market power can be detected in these instances,
the comments of Dr. David DeRamus are instructive. He states:
A simple initial indicator of the potential market foreclosure may
be the efficiency of the distressed asset itself - at the margin, if there
is excess capacity in a workably competitive market, I would expect
the least efficient unit to be the one most in danger of exiting the
market, not the most efficient unit. Similarly, a transaction should
not fundamentally change the extent to which a distressed asset is
dispatched; if dispatching an asset is economic after the acquisition,
I would expect that such dispatch should have been economic
before the acquisition as well. 15
InterGen believes that this type of change in dispatch – where the dispatch of the
acquired unit increases significantly upon the consummation of the transaction --- is
precisely what has occurred, and will continue to occur, with respect to future
acquisitions of distressed assets. Indeed, thousands of MW of merchant generation
(much of it currently classified as distressed) within Entergy’s control area would have
been dispatched, and would have displaced Entergy owned generation, if Entergy were
to engage in a security constrained economic dispatch in its control area. While these

See Order No. 592 at 68,609; Comments by David W. DeRamus, Ph.D., FERC Docket
No. RM04-7-000 at pp 2-3, filed June 30, 2004; Comments by David W. DeRamus, FERC
Docket No. PL04-9-000 at pp 2-3 filed June 30, 2004.
14

15

DeRamus Comments in Docket No. PL04-9-000 at 2.
11

1788634 v3; 12C4@03!.DOC

merchant generators largely sit idle, thousands of MW of older, inefficient utility owned
boilers continue to operate.
In Georgia and Arizona, the incumbent vertically integrated utility is
attempting to expand its rate-base not through the purchase of third party distressed
assets but though a merger with an affiliate that previously operated as a merchant
power producer. 16 In both of those jurisdictions, other merchant generation sits idle.
Thus, while, as noted above, some may argue that merchant problems are a function of
bad business decisions, the reality is that the merchant generators made the same
decision to build as did the merchant affiliate of the utility did – only without the safety
net afforded by the regulated business. Not only does this regulatory “safety net”
inherently shift risks from utility shareholders to ratepayers, (effectively a crosssubsidization of the unregulated business) but it will inexorably tilt the competitive
landscape against merchant generators and thereby suppress both competition and
investment.
As Dr. DeRamus noted in his comments, when a vertically integrated utility
forecloses competing generators from the wholesale market by refusing to purchase
their lower-cost generation, this constitutes the exercise of vertical market power, and in
particular monopsony power. 17 Dr. DeRamus notes that monopsony power is often
thought of as the exercise of market power by forcing prices down to uncompetitive
levels; however, in this context it is the refusal to purchase any competing generation at
all, despite its efficiency and cost advantages, that should be the driving concern in a
market power analysis.
16

See APS Rate Proceeding and Georgia Power Affiliate Proceeding, infra.

17

DeRamus Comments in Docket No. PL04-9-000 at 3.
12

1788634 v3; 12C4@03!.DOC

V.

Behavioral Remedies Are Not Effective To Address Vertical Market Power
Where the incentives and ability to exercise vertical market power and to

foreclose competition exist – whether through control over transmission, control over
inputs, or control over purchases -- the exercise of that vertical market power cannot be
effectively detected or remedied by behavioral rules. 18 In the past, behavioral
mitigation has primarily involved the adoption of various changes to market rules and
in particular after-the-fact monitoring of a vertically integrated utility’s behavior. To be
sure, while such behavioral mitigation has its place in developed markets, they simply
have not been proven to be effective in addressing the vertical market power concerns
described above. It is precisely for this reason that Order No. 2000 recognized that
structural changes were needed as well.
Today’s business environment for electric power producers reinforces the
necessity of structural remedies. For example, a utility can strategically affect the
transmission available for competing generators by its own dispatch decisions. The
decision to dispatch a utility-owned unit that is not otherwise economic may have the
dual effect of eliminating the merchant’s generator’s economic sale to the utility and
may also, as a result of an inefficient use of transmission resources, prevent a sale by the
merchant generator to a third party. The acquisition of merchant generation, therefore,
only will serve to exacerbate the market power problem by expanding the acquiring
entity’s fleet of generation and enhancing its ability and incentive to engage in
uneconomic dispatch and foreclose independent competitors from participating in a

Regional Transmission Organizations, Order No. 2000, [1996-2000 Transfer Binder] FERC
Stats. & Regs. ¶ 31,089 at 31,014 (1999); order on reh’g, Order No. 2000-A, [1996-2000
Transfer Binder] FERC Stats. & Regs. ¶ 31,092 (2000), aff’d sub nom. Public Utility District
No. 1 of Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir. 2001); DeRamus
Comments in Docket No. PL04-9-000 at 4.
18

13
1788634 v3; 12C4@03!.DOC

more active and competitive wholesale market. This type of vertical market foreclosure
cannot be adequately mitigated by simply establishing an independent market monitor.
Likewise, foreclosure by a refusal to purchase can be remedied only through
a competitive procurement requirement, including appropriate amounts of available,
lower-cost merchant generation in a utility’s economic dispatch protocol. There is
simply no legitimate downside to including lower-cost merchant generation in a
utility’s security-constrained economic dispatch protocol. If the merchant generation is
the lowest cost reliable source of power, it will be – and should be -- selected. If not, the
utility’s own generation will be – and should be -- dispatched. Thus, an economic
dispatch req uirement is by no means a ”forced purchase,” but rather it merely requires
a utility with market power to engage in rational purchasing decisions based on
efficiency considerations alone – the same result that would emerge through the
operation of an organized competitive market administered by an RTO, the same result
that emerges in a wide range of competitive markets, and clearly the result that benefits
consumers.
VI.

Properly Structured Competitive Solicitations are the Essential Structural
Solution to Mitigate Vertical Market Foreclosure.
As discussed above, behavioral approaches are ill-suited to either detect or

mitigate market foreclosure. Moreover, behavioral remedies foster troublesome and
costly after-the-fact litigation which does little or nothing to correct for market
opportunities which have been extinguished through foreclosure. Below, InterGen
recommends that the Commission condition mergers and facility acquisitions by
utilities operating outside of fully-functioning RTOs (i.e., areas without structural
safeguards to deter or prevent transmission and market foreclosure) and condition

14
1788634 v3; 12C4@03!.DOC

market-based rates of such utilities on structural mitigation of vertical market power
which will be visible, ensure competitive outcomes and provide market confidence.
With respect to market foreclosure, utilities should be ordered to adopt a
competitive procurement process for both short and long term power needs, including
the requirement to include merchants in economic dispatch. The design and
implementation of the competitive protocols should be overseen by an independent
entity, open to a stakeholder process and approved by the FERC and relevant state
commissions. The process could include a variety of products developed in
coordination with state commissions. The independent entity should review all aspects
of the procurement process on a day-to-day basis to ensure FERC, state commissions
and market participants that the structural protocols have been adhered to and that the
utility has not foreclosed merchants in favor of its own or its affiliates’ generation or
limited or unfairly discriminated on the basis of transmission access. 19
VII.

Recommendations
Although the Commission’s Merger Policy Statement mentions monopsony

power, the recent focus of the Commission’s merger analysis has been on monopoly
power. But, the recent past, in particular, has shown the extent to which utilities in
some parts of the country have been able to use their monopsony power to further their
monopoly power over generation, to the long-term detriment of competitive wholesale
markets. Furthermore, although the Commission has taken the interim step of
conditioning mergers and facility acquisitions on membership in an RTO, it has not

InterGen also generally supports the comments and recommendations of
Constellation Energy, filed in Docket No. PL04-6-000, on the need for an independently
administered, competitively neutral and standardized solicitation process to preclude
undue affiliate preference.
19

15
1788634 v3; 12C4@03!.DOC

taken such interim steps with respect to its allowance of market-based rates, looking
primarily at traditional monopolist tests. In analyzing market-based rate authority
requests, the Commission applies qualitative tests to determine whether market power
exists. The existing standards, in the context of the current competitive environment,
focus too much on “pivotal supplier” type tests and too little on the buyer market
power and the resulting ability of some utilities to foreclose competition through either
strategic use of transmission or a refusal to purchase.
Redirecting the Commission’s focus, particularly as to utilities and their
affiliates operating in areas without a fully-functioning RTO , is appropriate in today’s
environment. The incentives to exercise horizontal market power that the Commission
has recently focused on are greatest during periods of tight supply; thus, not only is the
exercise of horizontal market power often intermittent, it can often be addressed
through market monitoring and changes in specific market rules. In contrast, the
incentives to exercise vertical market power can only be mitigated by changes in either
the market structure or the regulatory structure. And unlike horizontal market power,
vertical market power is not self-correcting through increased investment, even over the
long-term; on the contrary, vertical market power exercised by foreclosing the market to
competition is self-reinforcing. The Commission, therefore, should condition its
approval of, mergers and facility acquisitions by utilities operating in regions without a
fully-functioning RTO and of market-based rates for such utilities and their affiliates on
structural mitigation of vertical market power, including a requirement that merchants
be included in economic dispatch or other appropriate competitive solicitations. (See
DeRamus Comments in Docket No. PL04-9, at 5).

16
1788634 v3; 12C4@03!.DOC

Merchant generators are laboring in certain regions with no or inadequate
competitive market structures to discipline opportunities for market foreclosure. Such
generators might not survive much longer in the absence of structural market power
mitigation in the very near term. Present circumstances warrant immediate, pragmatic
action to foster competition. Generators reeling from market foreclosure cannot afford
to continue awaiting the establishment and operation of fully functioning organized
markets through voluntary RTO formation. Nor should the Commission rely upon
other governmental agencies, such as retail public service commissions or the
Department of Justice/Federal Trade Commission, to effectively and consistently
enforce prudent purchase practices, let alone detect instances of vertical foreclosure in
wholesale power markets regulated by the Commission.
Indeed, in commenting on the jurisdictional overlap between FERC and the
antitrust agencies, Mr. Hilke, with the Federal Trade Commission, testified in these
proceedings that:
[w]hile the antitrust agencies will review mergers of independent
generators with utilities, asset transfers may very well be outside of
what the antitrust agencies consider to be actionable transactions.
So, if FERC is not reviewing these transactions, either because of a
policy decision or because of legislation, there may be no federal
overview of asset transactions between affiliates and parents. 20

20

Technical Conference Transcript at 46, FERC Docket No. PL04-9-000 (June 10, 2004).
17

1788634 v3; 12C4@03!.DOC

Consequently, in addition to its legal obligation and authority to act under
the FPA, practical considerations merit timely action by this Commission to prevent
further market foreclosure from occurring on its watch.
Date: July 1, 2004

Chad J. Wagner
InterGen Services, Inc.
15 Wayside Road
Burlington, MA 01803
Tel: (781) 564-6067
Fax: (781) 993-3098
Email: [email protected]

Respectfully submitted,
Michael J. Rustum (e-filed)
Larry F. Eisenstat
Michael J. Rustum
Michael R. Engleman
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street NW
Washington, D.C. 20037-1526
Tel.: (202) 785-9700
Fax: (202) 887-0689
E-Mail: [email protected]
[email protected]
Attorneys for InterGen Services, Inc.

18
1788634 v3; 12C4@03!.DOC