View:
As filed with the Securities and Exchange Commission on June 3,
1998.
File No. 70-09033
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________
AMENDMENT NO. 4 (U-1/A) TO
FORM U-1 APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Sempra Energy
101 Ash Street
San Diego, California 92101
(Name of company or companies filing this statement and
address of principal executive offices)
None
(Name of top registered holding company parent of each applicant
or declarant)
Richard D. Farman Stephen L. Baum
President and Chief Operating Officer President and Chief
Executive Officer
Pacific Enterprises Enova Corporation
555 West Fifth Street, Suite 2900 101 Ash Street
Los Angeles, California 90013-1001 San Diego, California
(213) 895-5000 (619) 696-2000
(Name and address of agents for service)
___________________________________________________________
The Commission is requested to send copies of all notices, orders
and communications in connection with this Application to:
Ruth S. Epstein, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Sempra Energy )
) File No. 70-9033
Amendment No. 4 To Application On )
Form U-1 Of Sempra Energy )
INTRODUCTION
On March 26, 1997, Sempra Energy (formerly, Mineral
Energy Company), a newly formed California corporation (the
"Company"), filed an application on Form U-1 (the "Application")
with the Securities and Exchange Commission (the "SEC" or the
"Commission") seeking authorization for its acquisition of Pacific
Enterprises ("Pacific") and Enova Corporation ("Enova") (the
"Transaction") under Sections 9(a)(2) and 10 of the Public Utility
Holding Company Act of 1935) (the "1935 Act" or the "Act"); the
Application also seeks an order exempting the Company (including
its subsidiaries) under Section 3(a)(1) of the Act from all
provisions of the Act except Section 9(a)(2). Applicant represents
that, upon consummation of the Transaction, the Company and its
subsidiaries will meet the requirements of the Section 3(a)(1)
exemption. The Application was amended on May 13, 1997, on January
28, 1998, and on April 7, 1998. On July 21, 1997, the maps
constituting Exhibits E-1, E-2, and E-3 were filed under Form SE.
On May 27, 1998, the Federal Energy Regulatory Commission
("FERC") issued its final order approving the Transaction, denying
all requests for rehearing of its earlier conditional order and
denying requests for a trial-type hearing. The Company hereby
amends the Application for the purpose of providing FERC's final
order. This amendment also includes information concerning the
Special Temporary Authorization obtained from the Federal
Communications Commission authorizing the consummation of the Transaction.
All capitalized terms used in this amendment will refer to the
definitions in the Application, unless otherwise indicated.
Item numbers used are those found in the Form U-1.
All other regulatory approvals necessary for consummating
the Transaction have now been obtained. FERC, the Department of
Justice, the California Public Utilities Commission ("CPUC"), the
California Attorney General, and the Nuclear Regulatory Commission
have all scrutinized the Transaction and concluded that - with
conditions that are acceptable to the applicants - it is consistent
with the public interest. This application has been pending before
the Commission since March 1997. The parties stand ready to close,
and it is critical to reaping the substantial benefits of the
Transaction, both for shareholders and consumers, that they be
permitted to do so at the earliest possible moment.
It is of particular importance that the Transaction be
permitted to close by June 30, 1998 so that combined operations may
commence by July 1. A business combination of this size and
complexity requires an enormous amount of advance preparation. By
way of example only, personnel decisions affecting the lives of
11,000 employees - hundreds of which involve relocation of families
and other major disruptions - have had to be made and communicated
to the individuals concerned. The parties commenced the final
phase of this preparation in late March of this year, when the CPUC
issued its final approval, in order to be ready for a prompt and
efficient closing.
Maintaining this state of readiness beyond July 1 will
result in significant costs and inefficiencies, both of a purely
financial nature and in the effects on individual lives. The
parties estimate the value of synergies foregone to be $6 million
for each month that the closing is delayed, on a gross basis. The adverse
effects on morale, productivity, and quality of life of so many careers and
life plans hanging in the balance cannot be quantified. Finally,
the parties cannot implement their strategy for competing in the
new deregulated California energy markets while the Transaction
hangs in limbo. The Company therefore requests that the Commission
issue its final order on the Application as promptly as possible,
and in any event no later than June 26, 1998, to permit a June 30
closing.
Item 4. Regulatory Approvals
B. Federal Power Act
By its order of May 27, the Federal Energy Regulatory
Commission ("FERC") granted final approval under Section 203 of
the Federal Power Act of the Enova - Pacific merger. In so doing,
FERC required certain limited changes in the mitigation measures
previously submitted by the applicants in satisfaction of the
conditions specified in FERC's order of June 25, 1997,
conditionally approving the merger. The May 27 order also
denied rehearing of the June 25 order and rejected claims by
various intervenors that a trial-type hearing is necessary.
E. Other
San Diego Gas & Electric Company ("SDG&E") and Southern
California Gas Company ("SoCalGas") hold licenses issued by the
Federal Communications Commission ("FCC") to use certain radio
frequency spectrum on certain prescribed terms and conditions.
Section 310(d) of the Communications Act of 1934, as amended (the
"Communications Act"), provides that an FCC license shall not be
assigned and control of an FCC licensee shall not be transferred
without the prior approval of the FCC. The FCC evaluates such
transactions to determine whether they serve the public interest,
convenience and necessity.
On May 22, 1998, a request for Special Temporary
Authorization (the "STA Request") and applications for permanent
authorizations were filed with the FCC requesting approval to
transfer control of SDG&E and SoCalGas to Sempra Energy. On May
28, 1998, the FCC granted the STA Request permitting consummation
of the merger. The grant of the STA Request expires on November
28, 1998. The applications requesting permanent authorization to
transfer control of SDG&E and SoCalGas to Sempra Energy are
pending.
Item 6. Exhibits and Financial Statements
The following exhibit is filed with this Amendment.
D-6
Order of FERC Denying Rehearing and Approving Disposition of
Facilities on a Final Basis.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned company has duly
caused this Amendment to the Application to be signed on its behalf
by the undersigned thereunto duly authorized.
SEMPRA ENERGY
Date: June 3, 1998 By: /s/ Frederick E. John
-------------------
Frederick E. John
Senior Vice President
. The applicants expect to make a filing at FERC in
compliance with this requirement in the near future; however, no
further action by FERC is required under the May 27 order for the
approval to be effective.
San Diego Gas & Electric Company and Enova Energy, Inc.
Enova Corporation and Pacific Enterprises, Southern
California Edison Company v. San Diego Gas and Electric
Company, Enova Energy, Inc., and Ensource Corp.
Docket Nos. EC97-12-001, EL97-15-002, EL97-21-001
FEDERAL ENERGY REGULATORY COMMISSION - COMMISSION
83 F.E.R.C. P61,199; 1998 FERC LEXIS 1003
ORDER DENYING REHEARING AND APPROVING DISPOSITION OF
FACILITIES ON A FINAL BASIS
May 27, 1998
PANEL: Before Commissioners: James J. Hoecker, Chairman; Vicky A.
Bailey, William L. Massey, Linda Breathitt, and Curt Hebert, Jr.
OPINION:
In this order, we deny rehearing of our order conditionally
approving the disposition of jurisdictional facilities that will
occur as a result of the merger of Enova Corporation (Enova) and
Pacific Enterprises (Pacific). n1 We also find that with certain
changes to the Applicants' proposed remedial measures, the
concerns we expressed in that order have now been resolved. Thus,
we approve the disposition of jurisdictional facilities on a final
basis.
n1 79 FERC P61,372 (1997)(Merger Order).
I. Background
A. Application and Merger Order
The background of this case is set out in detail in our
Merger Order. Briefly, Enova and Pacific are both public utility
holding companies. n2 Enova is the parent of San Diego Gas &
Electric Company (SDG&E), a traditional public utility that owns
natural-gas fired electric generating facilities, and of Enova
Energy, Inc. (Enova Energy), a power marketer. Pacific owns
Southern California Gas Company (SoCalGas), a natural gas
distribution company that provides delivered natural gas services
to gas-fired electric power generators throughout Southern
California. Enova and Pacific have also formed a joint venture,
Energy Pacific, to be a marketer of electricity and natural gas.
n2 They are exempt holding companies under section 3(a)(1) of the
Public Utility Holding Company Act of 1935, 15 U.S.C. sec. 79c(a)(1)
(1994).
In our Merger Order, we noted that this "convergence" or
vertical merger does not raise traditional horizontal market power
concerns because the companies involved do not compete in the same
product market. However, we explained that after a vertical
merger, the merged company may be able to use its position in one
segment of its business, the "upstream" segment (natural gas
delivery services), to influence competition in the "downstream"
segment (sales of electric power). After examining the upstream
and downstream markets in the case at hand, we concluded that both
were conducive to the exercise of market power. We stated that the
merger could impair competition in the downstream market through
"raising rivals' costs" and by facilitating anticompetitive
coordination. We pointed out that SoCalGas delivers natural gas to
virtually all gas-fired generators in Southern California.
Moreover, by virtue of this dominant position, SoCalGas has access
to sensitive market information regarding these generators' cost
and fuel use. We found that if the merger were approved
unconditionally, the merged company could use its vertical market
power to restrict competing generators' access to delivered gas
services, thus raising these generators' input costs and reducing
their ability to compete. This, in turn, would tend to increase
prices for electric power in California. n3
n3 We also found that entry by competitors would not be likely to
mitigate this market power.
We identified seven ways in which the merged company could
hamper competition. SoCalGas could:
(1) use competitive market information (such as gas usage,
service requirements of competing generators, advance knowledge of
competitors' projected fuel consumption, patterns, and costs) to
manipulate costs and service to SDG&E's advantage;
(2) offer transportation discounts to SDG&E that are not
offered or made available to competing generators;
(3) withhold or deny access to pipeline capacity to competing
generators;
(4) offer service contracts providing SoCalGas with unilateral
and arbitrary control over pipeline access, delivery points, etc.;
(5) manipulate storage injection schedules to effectively
withhold pipeline capacity from competing generators at strategic
times and thereby drive up wholesale electricity prices;
(6) force competing generators to renominate volumes to other
delivery points or purchase additional firm pipeline capacity by
citing the existence of difficult-to-verify operational
constraints on SoCalGas' system; and
(7) manipulate the terms and conditions of intrastate gas
tariffs to SDG&E's advantage by, for example, enforcing the letter
of SoCalGas' tariff when dealing with competing generators while
enforcing the terms of the tariff less rigorously when dealing
with SDG&E.
Having reached this conclusion, we next considered what
remedies could be used to address the problems raised by the
merger. We noted that the Public Utilities Commission of the State
of California (California Commission) has jurisdiction over
SoCalGas and concluded that "the most direct and effective way to
address the potential that SoCalGas will unduly discriminate in
favor of downstream affiliates" n4 was mitigation requirements
that were, for the most part, within the jurisdiction of the
California Commission. For instance, the California Commission has
direct authority to accept and enforce the Applicants' commitments
that the companies will not share market information with one
another without simultaneously making it available to non-
affiliates. The California Commission also has direct authority to
accept and enforce a commitment to observe restrictions designed
to prevent abuses between gas companies and their affiliates.
n4 79 FERC at 62,564.
Thus, we stated that if the California Commission approved
the merger and adopted certain mitigation requirements to prevent
SoCalGas from discriminating against non-affiliates, the
Applicants should file these proposed mitigation measures with us.
The mitigation measures were designed to preclude discriminatory
conduct by SoCalGas, ensure transparency of transactions involving
sales and purchases of gas transportation services, and separate
SDG&E's purchases of transportation service from SoCalGas for gas
that would be used for its electric generators from its other gas
transportation purchases. n5 The mitigation measures needed
involve codes of conduct (to regulate the sharing of market
information); application of the requirements of our Order No. 497
n6 (which is designed to prevent abuses of the affiliated
relationship between jurisdictional pipelines and marketers) to
SoCalGas; and a requirement that SoCalGas operate its electronic
bulletin board (EBB), GasSelect, as an interactive same-time
reservation and information system. We stated that if the
California Commission approved mitigation measures that were
different from those described in our Merger Order, we would
decide whether these deviations were acceptable for our purposes.
We also noted n7 that another way to eliminate the vertical market
power problems would be for SDG&E to divest its gas-fired plants.
n5 79 FERC at 62,564.
n6 Inquiry Into Alleged Anticompetitive Practices Related to
Marketing Affiliates of Interstate Pipelines, Order No. 497, 53
Fed. Reg. 22,139 (1988), FERC Statutes and Regulations,
Regulations Preambles 1986-1990 P 30,820 (1988), order on
rehearing, Order No. 497-A, 54 Fed. Reg. 52,781 (1989), FERC
Statutes and Regulations, Regulations Preambles 1986-1990 P 30,868
(1989), order extending sunset date, Order No. 497-B, 55 Fed. Reg.
53,291 (1990), FERC Statutes and Regulations, Regulations
Preambles 1986-1990 P 30,908 (1990), order extending sunset date
and amending final rule, Order No. 497-C, 57 Fed. Reg. 9 (1992),
FERC Statutes and Regulations P 30,934 (1991), reh'g denied, 57
Fed. Reg. 5815, 58 FERC P61,139 (1992), aff'd in part and remanded
in part, Tenneco Gas v. Federal Energy Regulatory Commission, 969
F.2d 1187 (D.C. Cir. 1992), order on remand, Order No. 497-D, 57
Fed. Reg. 58,978 (1992), FERC Statutes and Regulations P 30,958
(1992), order on reh'g and extending sunset date, Order No. 497-E,
59 Fed. Reg. 243 (1994), FERC Statutes and Regulations P 30,987
(1994), order on reh'g, Order No. 497-F, 59 Fed. Reg. 15,336
(1994), 66 FERC P61,347 (1994).
n7 79 FERC at 61,372, n.58.
B. Events Since the Merger Order
A number of intervenors requested rehearing of the Merger
Order. n8 Their arguments are discussed below.
n8 These include Southern California Edison Company (SoCal
Edison), Southern California Utility Power Pool (Power Pool),
Imperial Irrigation District (Imperial), the City of Vernon
(Vernon), the City of San Diego (San Diego), and Southern
California Public Power Authority (Public Power Authority).
After the Merger Order was issued, the Applicants filed a
motion for a supplemental order. n9 They stated that several
changes in circumstances since the issuance of the Merger Order
justified immediate approval of the merger without waiting for the
California Commission to take action. First, SDG&E has committed
itself to divestiture of its generating assets and has asked the
California Commission to approve that divestiture. The Applicants
pointed out that the Commission had already said that divestiture
of SDG&E's gas-fired plants could resolve our market power
concerns. This obviated the need for the remedies envisioned by
the Merger Order, they said. Second, SDG&E and SoCalGas had
submitted to the California Commission filings n10 in which they
committed themselves to restrictions on dealing with affiliates
that are designed to prevent abuses of the affiliation. The
Applicants said that these commitments meet the requirement
imposed by our Merger Order that they adopt a code of conduct.
They argued that in view of these developments, there was no need
for this Commission to wait for the California Commission to take
further action.
n9 Filed February 12, 1998.
n10 "Remedial Measures" filed as Attachment D to Applicants'
February 12, 1998 filing.
The Applicants also submitted n11 a stipulation filed by
Enova and the Department of Justice (DOJ) with a United States
District Court to resolve DOJ's concerns. The stipulation provides
that SDG&E must divest almost all of its gas-fired generation
within 18 months and limits Enova's ability to acquire new
generation capacity. The Applicants also state that the code of
conduct is now fully enforceable by the California Commission.
n11 Motion to Lodge Stipulation and Order filed March 10, 1998.
Several intervenors argued that these changes in circumstances do
not justify removal of the conditions. We need not resolve the
question of whether the changes in circumstances would, in
themselves, justify removal of the conditions. As noted below, the
California Commission has now approved the merger. The question to
be resolved is whether the changes in circumstances and the
California Commission's actions resolve the concerns expressed in
our Merger Order.
The California Commission approved the merger after adopting
and undertaking to enforce certain mitigation measures. n12 It
notes in its order n13 that it has adopted rules governing
transactions between affiliated natural gas local distribution
companies and electric utilities and their affiliates who market
energy and energy-related services. These rules are designed to
foster competition and to protect consumers, focusing particularly
on cross-subsidization (in which a utility's customers subsidize
an affiliate of the utility).
n12 Decision 98-03-073, March 26, 1998 (California Decision). The
conditions imposed by the California Commission are attached as
Appendix A to our order.
n13 California Decision at 9-10.
With regard to the effect of the merger on competition,
specifically vertical market power, the California Commission
examined the Remedial Measures submitted by the Applicants and
concluded that Applicants have met the requirements of this
Commission's Order No. 497. n14 To ensure compliance, the
California Commission set up a verification process to be carried
out by an independent firm.
n14 California Decision at 67-68.
The California Commission also required that SoCalGas divest
its options to purchase certain pipelines (the Kern River and
Mojave pipelines) that provide the only competition to SoCalGas.
It did so because it believed that competition in natural gas
transportation provides benefits to consumers, and if SoCalGas
exercised its options to buy these pipelines, there would be no
competition at all in the relevant market.
The Applicants then made a filing with this Commission n15 in
which they asked for final approval of the merger. Certain
intervenors argue in response that the Commission should not
approve the merger because the conditions imposed by us and by the
California Commission and the other changes in circumstances do
not resolve the problems with the merger. Their arguments are
discussed below. n16
n15 Filing of April 2, 1998. The Commission published notice of
the filing and provided an opportunity for comments. 63 Fed. Reg.
18,396 (1998).
n16 We will discuss these arguments as rehearing arguments insofar
as these intervenors (who earlier sought rehearing) argue not that
the California Commission did not do what we said was necessary,
but that our Merger Order did not address the full extent of the
market power that could be exercised by the merged company.
II. Issues
A. Rehearing Issues: Whether Our Merger Order Adequately Addressed
Market Power Concerns
1. Arguments
On rehearing, several parties argue that the conditions we
imposed in the Merger Order would not mitigate the merged
company's market power. For example, SoCal Edison argues n17 that
the Commission failed to recognize several kinds of
anticompetitive behavior in which the merged company could engage.
It says that the Commission focused entirely on the possibility of
discrimination that would favor SDG&E's gas-fired generation and
argues that there would also be opportunities for market
manipulation that would not involve such discrimination. For
instance, the merged company would benefit from higher rates for
electric power across the board. It could use its market power
over delivered gas services to raise the cost of gas-fired
generation to everyone, including SDG&E. Since spot market prices
in the California Power Exchange (PX) n18 will be set by the
marginal generating unit, which will generally be gas-fired, this
would raise the revenues of marginal and infra-marginal generating
units. n19
n17 SoCal Edison's Request for Rehearing at 8-21. Similar
arguments are raised by others, including Power Pool.
n18 We authorized establishment of the PX after our Merger Order
was issued. Pacific Gas and Electric Company, San Diego Gas and
Electric Company, and Southern California Edison Company, 77 FERC
P61,204 and P61,265 (1996), 81 FERC P61,122 (1997); 81 FERC
P61,122 (1997).
n19 Infra-marginal units are those with marginal costs below the
market-clearing price.
SoCal Edison describes a number of ways in which the merged
company could use its monopoly power in delivered gas services to
cause the effects described above even without discriminating in
favor of SDG&E. It argues that in addition to controlling
intrastate transportation to gas-fired generators and owning all
the storage in Southern California, the merged company would be
the dominant gas purchaser in the region. The combination of
dominating gas demand (gas flowing on the Southern California
pipeline system) and controlling gas storage would allow the
merged company to manipulate the gas system in a variety of ways.
For instance, SoCalGas decides where and when storage injection
and withdrawal will occur, which affects the price of gas. The
merged company's control of gas demand would enable it to
manipulate the release of interstate pipeline capacity and to
force other users to renominate gas shipments at an increased
cost.
SoCal Edison and others express concern that the merged
company could manipulate financial markets, even inhibiting the
growth of a secondary market for contracts written against the
spot market. Several parties argue that the only information
SoCalGas would need to manipulate the price of gas would be an
affiliate's (such as the Joint Venture's) publicly posted position
in the electricity futures or derivatives markets. SoCalGas could
increase or decrease competing generators' delivered gas costs to
increase or decrease electricity prices in the California PX and,
therefore, the value of affiliates' long or short positions. They
say that an alternating sequence of long and short positions could
be made profitable without affecting the average price of either
gas or power over that period. n20 Power Pool argues that the
similar outcomes would result from SoCalGas using non-public
insider information regarding real-time system operations and
customer activities (not prohibited by the remedial conditions) to
advantage itself or its affiliates in the energy commodity
derivatives markets. n21
n20 SoCal Edison filing of July 25, 1997 at 18-19; Public Power
Authority filing of July 25, 1997 at 20. Public Power Authority
refers only to" forward" positions.
n21 Power Pool filing of July 25, 1997 at 3. Such insider
information would originate from combining the gas procurement
functions of SDG&E's UEG with the retail functions of SDG&E and
SoCalGas.
According to SoCal Edison, n22 these manipulations of the
market would not be overtly discriminatory and would not be
checked by the remedial measures the Commission envisioned in the
Merger Order. The Commission wrongly assumed that reporting
requirements and standards of conduct that are sufficient to check
monopoly power in the intrastate natural gas market are also
sufficient when applied to the interstate market. SoCal Edison
argues n23 that the code of conduct requirement is inadequate
because: (1) it cannot prevent SoCalGas from acting "on the basis
of its knowledge of its affiliate's general positions" n24 ; and
(2) the 24-hour period during which SoCalGas may make discounts
available to its affiliates and not to others is too long, in view
of the speed with which the spot electricity market will move.
n22 SoCal Edison filing of July 25, 1997 at 8-9, 39-44.
n23 SoCal Edison filing of July 25, 1997 at 30-31.
n24 Id. at 30, citing Graves Affidavit P 41.
SoCal Edison argues that structural remedies are needed.
SoCalGas should divest its intrastate gas transmission and storage
facilities, and SDG&E should divest its gas distribution assets.
SoCal Edison says that the remedies we envisioned in our
Merger Order contain many weaknesses. n25 The marketing affiliate
rules are inadequate because SoCalGas can still manipulate the
price of and access to gas delivery services without disclosing
information to its affiliates by means of the following tools: (1)
access to nonpublic operational information (such as daily receipt
point capabilities and flow constraints); (2) intrastate access
(flexibility to determine which gas will flow and under what
conditions); (3) pricing and availability of intrastate services
(latitude in pricing hub services and in discounting other
services); (4) core procurement behavior (operation of SoCalGas's
market area storage that is directly connected to its intrastate
transportation system); and (5) interstate access and its effect
on the border price (control over the amount of capacity available
on the secondary interstate capacity market, which affects the
price of transportation capacity to the border of Southern
California).
n25 Id. at 21-32.
Imperial argues n26 that we correctly identified the major
concern with the merger -- SoCalGas's dominant position as a
supplier of delivered gas services -- but that the conditions we
envisioned are inadequate. The Commission should have focused the
remedies directly on wholesale electricity markets instead of on
the potential for SoCalGas to discriminate in favor of SDG&E.
Specifically, we should have adopted remedies "that operate
directly on the ability of the merger applicants to control prices
in the relevant wholesale bulk markets,...." n27 We also could
have convened a federal-state board under FPA section 209(b).
Finally, we could have simply disapproved the merger.
n26 Imperial Request for Rehearing at 3-10.
n27 Id. at 8.
Public Power Authority argues n28 that we did not recognize
certain anticompetitive effects of the proposed merger. It says
that we failed to look at the effect of the merger on the "energy
services or Btu market." The primary reason for the merger is to
enable the merged company to participate in this market. While we
recognized a possible effect on the energy services market, n29
according to Public Power Authority, we incorrectly assumed that
this was a retail matter only.
n28 Public Power Authority's filing of July 25, 1997 at 3-13.
n29 79 FERC at 62,566 (recognizing that to the extent gas and
electricity compete, the merger would eliminate a competitor).
Public Power Authority also argues that we overlooked the
effect of the corporate realignment on the wholesale component of
the energy services (Btu) market. It argues that Btus are
substitutes in wholesale markets, since Power Authority members
compare the cost of self-generating from gas-fired generation for
resale to their retail customers with the cost of purchasing
electricity in the wholesale market. n30 Absent the merger, Power
Authority argues that SoCalGas would be SDG&E's principal
competitor in the wholesale energy services market in southern
California. With the merger, the Applicants could raise the price
of gas when gas-fired generation is on the margin in the PX. An
increase in gas prices could increase the price of electricity to
Power Authority members, regardless of whether they self-generate
or purchase electricity at wholesale. Power Authority offers
analysis showing that post-merger, the Applicants would have a 56
percent share of the market in Btus in southern California and
that the merger would produce a change in HHI of almost 1000, for
a post-merger HHI of 3700. n31 Finally, Public Power Authority
argues that even if the energy services market is retail only,
this Commission should consider the effect of the merger on this
market.
n30 Public Power Authority's filing of March 28, 1998 at 8.
n31 Id. 9-10.
2. Resolution
As noted in the previous section, intervenors are concerned
that the Commission failed to address the full range of
competitive effects of the proposed merger, including: the effects
of combining gas procurement functions; the effects on financial
(energy commodity derivatives) markets; and the effects on the
energy services market. The Commission does not agree, for two
reasons. First, each of these arguments describes the very same
concern that the Commission addressed and discussed remedies for
in the Merger Order, that is, that raising the cost of delivered
gas would adversely affect prices and competition in the
downstream electricity markets in southern California. Second, the
proposed divestiture of SDG&E's gas-fired generation largely moots
the competitive concerns associated with the effects of combining
gas procurement functions and the effect of the proposed merger on
the energy services market. This is because the divestiture
significantly lessens the incentive for the merged company to
raise the cost of delivered gas and, therefore, electricity
prices.
a. Combination of Gas Procurement Functions
Certain intervenors are concerned about the competitive
implications of combining SoCalGas's and SDG&E's gas procurement
functions. They argue that this would enhance the merged entity's
ability to manipulate delivered gas prices and, therefore,
electricity prices in southern California. They are concerned that
the conditions imposed by the California Commission do not address
how the merged company could raise gas prices in such a way as to
disadvantage (while not necessarily discriminating against) non-
affiliated users through the manipulation of storage and gas
transportation services.
The Commission believes that we have addressed this
competitive concern in the Merger Order. First, as we noted above,
the mechanism by which prices and competition in the downstream
electricity market would be adversely affected by the combination
of gas procurement functions is the same mechanism the Commission
described and proposed remedies for in the Merger Order. The
second remedial condition is, in part, designed to address
situations in which the merged company's actions could have a
detrimental effect on competition in the downstream electricity
market without overtly discriminating against competing
generators. n33 The condition accomplishes this by requiring the
merged company to set up an information "firewall" between the
upstream affiliate, SoCalGas, and downstream affiliates with an
electric power merchant function. Without such a "firewall,"
SoCalGas could transfer competitively sensitive information to
downstream generation affiliates, thereby "chilling" competition
in the downstream electricity market.
n33 See Order 497 restrictions, discussed below.
Second, the planned divestiture of SDG&E's gas-fired
generation will largely resolve this concern. Without the need to
purchase gas for SDG&E's electric generators, there will be fewer
gas purchases to" consolidate" (and those remaining would largely
be limited to SoCalGas's retail and SDG&E's retail components).
Even with such a consolidation, the divestiture largely removes
the incentive for the merged company to manipulate gas prices,
since it will have less marginal and inframarginal capacity on
which to collect higher downstream revenues. We discuss the
divestiture question in more detail in Section D, below.
b. Financial Markets
Certain intervenors argue that the merged entity could
manipulate gas prices to ensure the profitability of affiliates'
positions in the energy commodity derivatives markets. For
example, SoCal Edison contends that manipulating the electricity
futures market could result in corresponding changes in the spot
electricity markets and hamper the growth of the secondary market
for contracts written against the spot market. We have already
addressed any competitive aspect of this issue in our Merger
Order. Again, the argument regarding the energy commodity
derivatives market describes the same mechanism (manipulation of
delivered gas prices to adversely affect prices and competition
and therefore profit in the downstream electricity market) that we
described and discussed remedies for in the Merger Order.
We are also skeptical that the merged company could profit
from manipulating gas prices to ensure the profitability of
affiliates' positions in the derivatives markets. No intervenor
provides any analysis supporting the contention that such a scheme
would prove profitable. Also, these intervenors themselves
recognize that such a scheme would require the systematic
manipulation of gas prices by SoCalGas. n34 Such manipulation is
tantamount to manipulation of the commodity markets, an abuse that
is subject to the jurisdiction of other agencies. n35
n34 SoCal Edison implicitly recognizes this requirement when it
states that an alternating sequence of long and short positions
could be made profitable without affecting the average price of
either gas or power over that period. SoCal Edison at 19.
n35 The Commodity Exchange Act, enforced by the Commodity Futures
Trading Commission, prohibits market manipulation of the type
envisioned by the parties.
Finally, it is incorrect to state, as do some of the
intervenors, that the only information needed to implement the
strategy they envision is publicly posted. Individual positions in
the futures markets are not publicly posted. What are periodically
posted, under the requirements of the Commodity Exchange Act, are
numbers of contracts and traders. n36 Therefore, it would not be
possible for SoCalGas to manipulate gas prices based only on
publicly posted positions of its affiliates. Instead, it would
require the transfer of information between affiliates, and we
concur with the California Commission's position on the transfer
of inside information: "we will not presume that officers of the
merged company are prepared to conspire to violate criminal
statutes. . . ." n37
n36 Trading reports can be obtained from the Commodity Futures
Trading Commission, Department of Economic Analysis web site.
n37 California Decision at 64.
c. Energy Services Market
Public Power Authority argues that we failed to address the
competitive effect of the merger on the retail and wholesale
components of the energy services (Btu) market. We have already
addressed the competitive implications of this argument in our
Merger Order. Public Power Authority's argument is essentially
that the merged entity can raise gas prices to adversely affect
prices and competition in the downstream electricity market.
Public Power Authority simply recasts this vertical market power
concern as a" horizontal" effect of the merger by which a supplier
of Btus is eliminated as a result of the merger. It says that the
proposed merger would eliminate a competitive supplier of Btus,
potentially enabling the merged company to withhold Btus from the
market, raising the price of Btus and, therefore, of electricity.
n38 The Commission addressed and discussed remedies for this in
the Merger Order.
n38 For example, price competition in the pre-merger Btu market
would produce lower delivered gas prices (increasing the
attractiveness of self-generating) and lower electricity prices
(increasing the attractiveness of purchasing electricity). Whether
higher electricity prices would be likely to result depends on the
extent to which customers could turn to other sellers of Btus to
avoid a price increase, including switching to other (gas and non-
gas) fuel suppliers to purchase Btus and switching to other
suppliers to purchase Btus in the form of electricity.
Moreover, the Btu market concentration analysis offered by
Public Power Authority does not explicitly address the effect of
the merger on the wholesale energy services market and, therefore,
does not support its argument regarding the effect of the merger
on the wholesale energy services market. n39 Moreover, with the
planned divestiture, SDG&E's generation will remain a non-
affiliated (independent) competitor in the wholesale energy
services market. Therefore, the proposed merger will bring about
no significant change in concentration in the wholesale energy
services market.
n39 Public Power Authority Protest and Motion to Intervene and
Consolidate, Exhibit 1, at 9-13. Data from which SoCalGas's Btu
market share is calculated include sales to non-utility end-use
(retail) customers in California. Data from which SDG&E's Btu
market share is calculated include both retail and wholesale
electricity sales.
Finally, as to whether we abdicated our responsibility under
section 203 by leaving competitive issues associated with the
retail component of the energy services markets to the California
Commission, we note that we explained in our Merger Order that as
a retail issue, this would be more appropriately addressed by the
California Commission, which did not request our assistance.
Public Power Authority has provided no reason why we should depart
from the policy set forth in our Merger Policy Statement, where we
said that we will only consider retail issues when the affected
state lacks authority to do so and raises concerns. n40
n40 Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act: Policy Statement, Order No. 592, 61 Fed. Reg.
68,595 (1996), FERC Statutes & Regulations P 31,044 (1996), order
on reconsideration, 78 FERC P61,321 (1997) (Merger Policy
Statement). As we stated in Baltimore Gas & Electric Company and
Potomac Electric Power Company, 79 FERC P61,105 at 61,115 (1997),
the effect of a merger on retail competition merits consideration,
but is appropriately addressed by the state and District of
Columbia commissions.
C. Rehearing Issues: Whether Commission's Reliance on State-
Imposed Remedies is Improper
1. Arguments
Several intervenors n41 argue that the Commission has ample
legal authority to order the remedies envisioned in the Merger
Order and that we should have directly required these (or other)
remedies as conditions of approving the merger rather than leaving
it to the California Commission to impose them. For example,
Vernon argues n42 that under the FPA, we cannot defer to a state
the implementation of remedies that are necessary to meet the
federal standard that the merger be consistent with the public
interest. While Vernon recognizes that there is "overlapping"
state and federal jurisdiction, n43 this should not prevent us
from exercising our authority to impose and enforce the remedies
directly. The fact that SoCalGas is not under our jurisdiction
does not mean that we lack authority to order remedies to address
our concerns about the merger. Vernon argues that our reliance on
remedies imposed by the California Commission is an impermissible
delegation of our regulatory responsibilities to a state agency,
citing several court decisions on delegation of an agency's
duties.
n41 These include Vernon, SoCalEdison, and Public Power Authority.
n42 Vernon Request for Rehearing at 6-17.
n43 Id. at 7. Similar arguments were raised by Public Power
Authority, among others.
Even if the reliance on the state can be defended legally on
the grounds that this Commission intended to review the state's
remedies to ensure that our goals are met, Vernon argues that, as
a matter of policy, we should not adopt such an approach. It says
that this approach is inefficient and puts the Commission in the
position of either "rubber-stamping" the state's decision or
possibly coming into conflict with the state.
Vernon also argues that our reliance on the California
Commission to impose remedies could be construed as an attempt to
induce a change in the state's regulatory policies. It argues that
it is "inappropriate and, in some circumstances, unlawful" n44 for
the federal government to attempt to impose its policies on a
state agency that has a different statutory mandate. Similarly,
Imperial Irrigation argues n45 that this Commission cannot
"commandeer" the State's processes, citing several cases in which
courts struck down such actions. n46
n44 Vernon Request for Rehearing at 15, citing Altamont Gas
Transmission Company v. FERC (Altamont), 92 F.3d 1239 (D.C. Cir.
1990). Similar arguments were raised by other intervenors.
n45 Imperial Request for Rehearing at 12-16.
n46 Id. at 12-14, citing Hodel v. Virginia Surface Mining &
Reclamation Assoc., Inc. (Hodel), 452 U.S. 264 (1981); New York v.
United States (New York), 505 U.S. 144 at 168 (1991), and Printz
v. United States (Printz), 117 S. Ct. 2365 (1997).
2. Resolution
To some degree, these issues are moot, now that the
California Commission has actually imposed conditions on the
merger and undertaken to enforce them. If the State had imposed
its conditions before the Applicants filed their section 203
application here, we certainly could have taken those state-
imposed conditions into consideration when deciding whether to
approve the merger. Thus, we need not decide whether we would have
had legal authority to impose the conditions directly ourselves;
the California Commission has now imposed the conditions, and we
need to decide only whether those conditions (and other changes in
circumstances) are sufficient to assure us that the disposition of
jurisdictional facilities is consistent with the public interest.
We do not agree that our reliance on the State's conditions
impermissibly delegates our responsibilities to the State. We have
reviewed the California Commission's conditions and are satisfied
that (with one change to those conditions) the disposition of
jurisdictional facilities will be consistent with the public
interest. We will not presume that the Applicants will not comply
with the conditions or that the State will not enforce them.
Moreover, we retain authority under FPA section 203(b) to issue
any supplementary order that is necessary or appropriate.
The cases cited by Vernon do not undermine our determination.
In Assiniboine, n47 the court considered whether a federal agency
could have improperly abdicated its responsibility to a state
agency. While the Court of Appeals held that the District Court
improperly dismissed the case and that there was, in fact, a
justiciable controversy, the facts were entirely different from
those in this case. The state agency to which the federal agency
deferred had no jurisdiction over the subject, while the federal
agency had a fiduciary duty and had to meet the strict standard
applicable to a trustee. Moreover, the court accepted as true for
purposes of deciding whether the case should be dismissed the
plaintiff's claim that the federal agency made no independent
review of the state agency's recommendation.
n47 Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation v. Board of Oil and Gas Conservation of the State of
Montana, 792 F.2d 782 (9th Cir. 1986).
Likewise, the facts in Sierra Club v. United States Army
Corps of Engineers (COE) n48 were entirely different. There, the
court held that a federal agency cannot simply delegate its
responsibilities under the National Environmental Policy Act
(NEPA) to a state agency. It specifically noted in COE that the
federal agency had done no independent evaluation whatsoever of
the state's action. Moreover, as Vernon itself admits, many other
cases find that there is no improper delegation when the federal
agency independently reviews the state action. n49
n48 701 F.2d 1011 (2d Cir. 1983).
n49 Save Our Wetlands Inc. v. Sands, 711 F.2d 634 (5th Cir. 1983)
(no abdication of agency responsibility where agency independently
reviewed consultant's work, rather than "rubber-stamping" it);
Sierra Club v. Lynn, 502 F.2d 43 (5th Cir. 1974), cert. denied,
421 U.S. 994 (1974) (similar).
We have not simply delegated our responsibility to the
California Commission. n50 Rather, consistent with the cases cited
by Vernon, in our prior order we deferred the specific terms by
which remedies were to be accomplished to another agency that does
have jurisdiction over the subject matter, and in this order we
independently review that agency's remedial measures. n51
n50 We also note that the court expressed concern that the state
agency involved had its own goals and that in its effort to obtain
federal approval of the project at issue, the state might make
self-serving assumptions in its preparation of NEPA documents. In
fact, the court found that the NEPA document at issue was entirely
inadequate.
n51 79 FERC at 62,565.
We also do not agree that the Merger Order was an attempt to
"commandeer" the State's processes. While SoCal Edison states that
the California Commission "responded to the Commission's mandate"
by instituting a hearing on the merger application, n52 this
Commission did not mandate that the California Commission do
anything. Rather, we concluded that if applicants committed to the
remedial mechanisms discussed in our order and if the California
Commission accepted those remedial mechanisms that were in its
jurisdiction, the proposed merger would be consistent with the
public interest. n53 We note that the California Commission was
not acting merely in response to a Commission order. It has
authority and responsibility under state law to review the merger.
n52 Filing of April 22, 1998 at 3.
n53 79 FERC at 62,565.
The California Commission was entirely free not to adopt the
conditions that this Commission found would be necessary for it to
approve the merger. n54 Thus, far from being coercive, our actions
were designed to serve the interests of comity and efficiency in
the use of regulatory resources. The Merger Order was not an
attempt to improperly induce a change in the State's policies or
to improperly influence the outcome of the California proceeding,
as Vernon suggests. n55
n54 The cases Imperial cites involve Tenth Amendment challenges to
Federal legislation and they do not support its argument that we
"commandeered" the state process. For example, in Hodel, the court
examined a federal statute that directly regulated surface mining
but that also encouraged the states to adopt their own programs by
allowing the states to regulate surface mining as long as the
states adopted requirements that met the federally-established
minimum requirements. The court held that this federal statute did
not commandeer the states' legislative processes. The New York
case illustrates what does constitute an improper commandeering of
the states' processes. In that case, the court struck down federal
legislation that ordered the states to implement federal standards
on radioactive waste. The court held that while Congress could
itself directly regulate radioactive waste, it could not force the
states to do so. The court contrasted that statute with the one
upheld in Hodel, which merely encouraged the states to adopt
certain standards. The Printz case makes a similar point.
n55 The Altamont case also does not support Vernon's position. Our
Merger Order was not an improper attempt to induce a change in the
State's policies in a matter beyond our jurisdiction, as was the
case in Altamont.
C. Compliance Issues: Whether Concerns Commission Expressed in
Merger Order Have Now Been Met
In the California Commission proceeding dealing with the
merger, Applicants proposed 23 Remedial Measures. The California
Commission adopted conditions that incorporated (with revisions)
these Remedial Measures and added two other commitments. n56 It
undertook to enforce the mitigation measures envisioned by this
Commission and says that it will create an independent
verification process. The California Commission stated that it was
confident that Applicants would comply with any changes required
by this Commission. n57
n56 The California Commission's conditions are set forth in
Appendix A to this order.
n57 California Commission decision at 67.
1. Arguments
Applicants argue n58 that the concerns we expressed in the
Merger Order have now been met. They say that: they have filed the
required codes of conduct for SDG&E and Enova Energy; n59 they
have agreed to apply the standards of the Commission's Order No.
497 to SoCalGas; SoCalGas is operating GasSelect as an interactive
same-time reservation system; SDG&E and Enova Energy are buying
gas transportation from SoCalGas for electric generation
separately from that bought for other purposes; and the California
Commission has required SoCalGas to post on GasSelect its use of
pipeline capacity to fill storage. The Applicants also point to
the planned divestiture of SDG&E's generation and power purchases
and several other measures not required by our Merger Order,
including the functional unbundling of SoCalGas' operations and
procurement functions and its commitment to get the California
Commission's approval before offering transportation discounts to
its affiliates.
n58 Filing of April 2, 1998.
n59 Applicants refer to Enova Energy's filing of a revised code of
conduct in Docket No. ER96-2372-008 and a code of conduct for
SDG&E as part of a section 203 application filed by SDG&E, Enova
Energy and AIG Trading Corporation (AIG). AIG is being acquired by
a joint venture owned equally by Pacific and Enova. The Commission
approved the acquisition subject to the same conditions imposed in
our Merger Order. San Diego Gas & Electric Company, Enova Energy,
Inc. and AIG Trading Corporation, 81 FERC P61,410 (1997), reh'g
pending.
SoCal Edison argues that the Applicants did not fully comply
with what we required. It identifies several provisions in the
conditions that it claims can easily be abused. For instance,
Conditions 1, 8, and 18 require equal treatment for "similarly
situated" non-affiliated shippers, but do not define this term,
and SoCalGas could construe it to mean "identically" situated.
Condition 8 says that SoCalGas must offer "comparable" discounts
to non-affiliates, but does not define that term. Moreover, our
Merger Order said that SoCalGas must maintain its EBB, GasSelect,
as a same-time information system, but SoCalGas proposes to use it
as a same-day system. Thus, SoCalGas would be able to withhold
information from non-affiliates for some number of hours.
Moreover, all the conditions would be difficult to monitor and
enforce, SoCal Edison says.
SoCal Edison also faults the absence of detailed procedures
for ensuring compliance with the Order No. 497 restrictions
referred to in condition 9-I and believes that procedures outlined
in condition 14-N for auditing communications between Operations
and shippers on the system, including Gas Acquisition, are
unworkable. In addition, it criticizes the lack of detail needed
to ensure effective monitoring and enforcement and to investigate
and resolve complaints.
Imperial argues that the California Decision does not fully
implement the remedies set forth in our Merger Order. n60 It
points out that our Merger Order says that in order to mitigate
the market power created by the merger, the Order No. 497
restrictions would have to be expanded to address the potential
for abuse of any of the affiliated relationships within the merged
company. n61 According to Imperial, four conditions imposed by the
California Commission do not apply to the entire corporate family.
The restrictions are limited to "marketing" affiliates and SDG&E
and should be expanded to cover any present or future affiliate
that has a gas or electric merchant function. Moreover, conditions
5 and 6 restrict only disclosure of information by SoCalGas to its
affiliates. Likewise, Imperial argues that these conditions should
be expanded to be reciprocal among SoCalGas and marketing
affiliates engaged in a gas or electric merchant function. n62
n60 Filing of April 22, 1998 at 6-15.
n61 79 FERC at 62,565.
n62 Imperial cites the Commission's recent Notice of Proposed
Rulemaking, Revised Filing Requirements Under Part 33 of the
Commission's Regulations, 83 FERC P61,027 at fn. 59 (1998), where
we expressed concern over the many possible types of
anticompetitive coordination, particularly involving the passing
of information among affiliates.
Finally, Imperial argues that the conditions imposed by the
California Commission do not meet our requirement that SoCalGas's
EBB, GasSelect, be operated as a same-time information and
reservation system. It says that the Commission could not have
meant that it would be acceptable for SoCalGas to simply keep
operating GasSelect as it has done in the past. Imperial argues
that the Applicants' operation of GasSelect does not offer truly
equal access to information on discounting; not only is the
information not released contemporaneously, but the information
that would be posted is inadequate in several respects. For
instance, Remedial Measures 16 and 13 contain an ambiguous, open-
ended provision that a seven-day delay in posting is permitted for
information exchanged between SoCalGas's Gas Operations and Gas
Acquisition where necessary for reliability and system balancing.
Imperial also identifies Remedial Measures No. 8 and 15 as
inadequate.
2. Resolution
a. Order No. 497 Restrictions
To satisfy the requirement that they adopt restrictions on
the sharing of information, Applicants rely on conditions A
through K imposed by the California Commission. They note that the
California Commission stated that it "has the authority and shall
enforce SoCalGas's compliance with [FERC] Order No. 497 . . . ."
n63
n63 California Decision at 146.
The Commission does not believe that the applicability of the
restrictions to marketing affiliates and the gas or electric
merchant function of SDG&E meets our objective. Non-marketing
affiliates with electric merchant functions with the exception of
SDG&E would be exempt from conditions 3-C, 5-E, 6-F, 8-H. Our
concern is that any transfer by SoCalGas of competitively-
sensitive information to its downstream electric generation
affiliates could adversely affect competition in the downstream
electricity market. Therefore, we grant Imperial Irrigation's
request regarding the affiliates that are addressed in conditions
3-C, 5-E, 6-F and 8-H and direct Applicants to modify these
conditions to apply to any affiliate in the corporate family with
an electric power merchant function. n64
n64 In Morgan Stanley, 72 FERC P61,082 at 61,436-7 (1995), the
Commission announced that for public utilities that are not exempt
wholesale generators (EWGs), it would, for purposes of Part II of
the FPA, define "affiliate" as that term is defined in section
161.2 of the Commission's regulations, 18 C.F.R. sec. 161.2 (1997).
Public utilities that are EWGs must define an "affiliate" for
purposes of evaluating EWG rates as set forth in section 2(a) of
the Public Utility Holding Company Act. If the merged company has
any questions about whether an entity in which it has an ownership
interest falls within the definition of affiliate, it may seek a
declaratory order from the Commission.
We disagree that allowing certain communications relating to
system reliability and balancing service between Gas Operations
and Gas Acquisition to be posted up to seven days after the fact,
is an unwarranted exception to the contemporaneous posting
requirement. We note that SoCalGas is obligated under condition 9-
I to file procedures with the California Commission that will
enable shippers and the California Commission to determine whether
SoCalGas is complying with Order No. 497 requirements. The
California Commission has determined that it has the authority to
enforce all of the conditions. This includes authority to adopt
necessary enforcement procedures. We also have continuing
authority under section 203(b) to ensure compliance.
b. Codes of Conduct
We find that with certain revisions, the codes of conduct
will comport with the standards applicable to affiliated public
utility marketers. n65
n65 Applicants should also file the revised codes of conduct as a
supplement to Enova Energy's market-based rate schedule and as an
amendment to SDG&E's market-based power sales tariff. SDG&E
recently received conditional market-based rate authority. See
pacific Gas and Electric Company, et al., 81 FERC P61,122 at
61,537 (1997).
The revisions that are necessary are in sections 2 and 4 of
both codes of conduct. Section 2 in each code of conduct addresses
information-sharing requirements. Enova Energy and SDG&E agree to
abide by the Standards of Conduct established in Order No. 889.
n66 However, pursuant to our rulings in other market-based rate
authority cases, the Commission believes it is necessary for each
code of conduct to also separately provide that to the fullest
extent possible, the employees of Enova Energy and SDG&E will
operate independently of each other. n67
n66 Codified at 18 C.F.R. sec. 37.1 - 37.4. The purpose of this part
of the regulations is to ensure that potential transmission
customers receive access to information that will enable them to
obtain transmission service on a non-discriminatory basis from any
transmission provider.
n67 See Illinova Power Marketing, Inc., 79 FERC P61,010 at 61,066-
67 (1977); Energis Resources Incorporated, 79 FERC P61,170 at
61,796 (1997); and Horizon Energy Company, 81 FERC P61,368 at
62,750-51 (1977).
Section 2.B of each code of conduct prohibits sharing between
SDG&E and Enova Energy (or between SDG&E and any electric
marketing affiliate) of information concerning "possible wholesale
power transactions (e.g., customer information), unless such
information is publicly available or simultaneously made publicly
available." The Commission is concerned that the reference to
"possible wholesale power transactions" may be viewed as a limit
on the type of information covered by the provision. As we have
concluded previously, "any communication between the two
concerning the utility's power or transmission business ..." is
subject to this requirement. n68 The requirement applies to any
communication concerning power or transmission business, present
or future, positive or negative, concrete or potential. n69 Both
codes of conduct are to be revised accordingly. Also, to eliminate
any ambiguity, section 4.B of SDG&E's code of conduct must be
revised to require SDG&E to make available "simultaneously" any
non-public market information it provides to its marketing
affiliates.
n68 UtiliCorp United, Inc., 75 FERC P61,168 at 61,557 (1996)
(emphasis added).
n69 See 79 FERC at 61,796 and Unitil Power Corp., et al., 80 FERC
P61,358 at 62,226 (1997).
With respect to brokering, section 4 of Enova Energy's code
of conduct provides that Enova Energy will attempt to broker
SDG&E's power first before offering its own wholesale power on the
condition that SDG&E's power is not more costly than Enova
Energy's own wholesale power. Consistent with Wholesale Power
Services, n70 this provision must be revised to provide that any
SDG&E power available for brokering will be offered first,
irrespective of its cost relative to cost of other power Enova
Energy is offering for sale.
n70 72 FERC P61,284 at 62,226-27 (1995).
Also with regard to brokering, while we note that section 4
of SDG&E's code of conduct provides that SDG&E will not pay any
brokerage fee or commission to any electric marketing affiliate
and that SDG&E will use non-affiliated brokers for wholesale power
transactions when opportunities arise, Enova Energy's code of
conduct lacks parallel provisions. Enova Energy must amend its
code to provide that it will not accept fees or commissions from
SDG&E and that its brokerage arrangements with SDG&E allow SDG&E
to use other brokers as opportunities arise.
c. Electronic Bulletin Board (EBB)
Condition 20-T, imposed by the California Commission,
provides that SoCalGas shall continue to maintain an EBB that is
an interactive same-day reservation and information system and
that when SoCalGas is required to post information on the
GasSelect EBB, the information shall be posted within one hour of
an executed transaction or the receipt and/or transmission of any
relevant information. Applicants state that with this condition,
GasSelect is operating as an interactive same-time reservation
system.
Both SoCal Edison and Imperial contend that SoCalGas's EBB
does not comply with the Commission's requirement for a same-time
reservation and information system, since Applicants admit that
data are not actually posted at the same time they are generated
or used by SoCalGas and its affiliates. According to SoCal Edison,
GasSelect compounds the deficiencies of Order No. 497 restrictions
in preventing discrimination by failing to specify when a non-
affiliated shipper would learn of any potentially preferential
treatment by SoCalGas to an affiliate. SoCal Edison asserts that
SoCalGas could exercise its discretion in timing of release of
information to deny "comparable" terms on the basis that the time
lapse prevents the affiliate and non-affiliates from being
"similarly situated."
Imperial also argues that rather than simply requiring a
continuation of the status quo operation of the EBB, the Merger
Order's use of "same-time" must have contemplated more than the
usual Order No. 497 end-of-day posting requirement for information
required to be posted contemporaneously. Imperial suggests that
the Commission appears to have intended that some Order No. 889-A
requirements be added, such as posting communications concerning
discounting. n71 As Imperial views condition 8-H, it does not
actually require the EBB posting of notification of availability
of a comparable discount for non-affiliated shippers. Finally,
Imperial contends that condition 13-M's statement that
communications between Gas Acquisition and Gas Operations are to
occur "preferably" through the EBB calls into question whether
SoCalGas will actually be operating a same-time reservation and
information system in practice.
n71 See Open Access Same-Time Information System and Standards of
Conduct, Order No. 889-A, 62 Fed. Reg. 12,484 (March 14, 1997),
FERC Stats. & Regs. (Regulations and Preambles 1991-1996) P 31,049
at 30,562, order on reh'g, Order No. 889-B, 81 FERC P61,253
(1997).
The Commission finds that conditions 9-I, 13-M and 14-N will
allow the California Commission to resolve concerns about any
communications that occur outside the EBB. The California
Commission states that it has authority to ensure compliance with
each of the conditions and that it can develop detailed procedures
to enforce the measures, as necessary. We further note that under
condition 17-Q, SoCalGas is required to propose to the California
Commission in an upcoming Gas Industry Restructuring proceeding
certain provisions that may clarify the nature of communications
between Gas Acquisition and Gas Operations to be conducted outside
the EBB. In addition, while communications necessary to provide
system reliability and balancing services are not restricted
between Gas Operations and Gas Acquisition, all such
communications are to be posted and will be available for
scrutiny.
Concerns similar to those expressed by Imperial and SoCal
Edison about the availability or posting of information regarding
gas transportation discounts as required by condition 8-H were
addressed in Order No. 566-A. n72 There, shippers had sought to
have offers of discounts posted on the EBB during negotiations, in
addition to posting the final offer. The Commission struck a
balance between providing for disclosure of affiliate discount
information and the preservation of competition between affiliates
and non-affiliates. Under Standard H of the Order No. 497
requirements, a pipeline is obligated to make discounts offered to
affiliates contemporaneously available to non-affiliates. The
Commission determined that the 24-hour posting requirement after
gas first begins to flow was adequate to allow a non-affiliate to
examine whether a denial of a discount to it is discriminatory.
Here, as the California Commission points out, Applicants have
agreed to seek prior approval from the California Commission of
any transportation rate discount offered to any affiliated shipper
(Remedial Measure 19-S). Applicants have also committed to posting
such information within one hour of an executed transaction
(Remedial Measure 20-T). We believe that these conditions achieve
sufficient timeliness with respect to information flow and
communication to resolve discrimination concerns. Intervenors have
presented no new arguments that would cause us to alter this
conclusion.
n72 Standards of Conduct and Reporting Requirements for
Transportation and Affiliate Transactions, Order No. 566-A, 59
Fed. Reg. 52,896 (October 20, 1994), FERC Statutes & Regulations,
Regulations Preambles 1991-1996 P 31,002 at 31,123-27, order on
rehearing, 69 FERC P61,334 (1994).
d. Separation of Gas Purchases
The California Commission imposed condition 18-R, which
requires that SDG&E and any affiliate of SoCalGas shipping gas on
the systems of SoCalGas and/or SDG&E use the GasSelect EBB to
nominate and schedule gas used in electric generation separately
from other gas it ships on either system. Condition 18-R also
provides that such gas will be transported under rates and terms
no more favorable than those available to similarly-situated non-
affiliated shippers for transporting gas used in electric
generation. Applicants state that SDG&E and Enova Energy are
currently purchasing gas transportation from SoCalGas in
accordance with these requirements. n73
n73 In their February 12, 1998 motion for a supplemental order (at
p. 11, note 14), the Applicants indicate that they have filed with
the California Commission a tariff establishing non-discriminatory
transportation service to the interconnection points between
SoCalGas and SDG&E. According to the Applicants, this tariff
permits any shipper on both SoCalGas and SDG&E to obtain
transportation from SoCalGas on the same terms as does SDG&E's
electric generation load.
The Commission finds that condition 18-R complies with our
requirement. We note there will be a continued need for this
requirement, despite SDG&E's commitment to divest its gas-fired
generation. Under the consent decree, neither SDG&E nor any
affiliate is prohibited from acquiring additional gas-fired
generating capacity in the future, although a cap is placed on the
amount of capacity that can be acquired. n74
n74 The Final Judgement (which was attached to the Applicants'
March 10, 1998 filing) provides generally in section V.B.1 that
the Applicants can acquire or control California generation
facilities only if they do not own or control more than 500 MW of
capacity in such facilities. Section V.C. sets forth certain
exceptions to this limit.
e. Advance Posting of Information on GasSelect
We required that SoCalGas publicize in advance on the
GasSelect EBB its planned use of pipeline capacity to fill
storage. Under condition 21-U, SoCalGas is to post daily on the
GasSelect EBB information for the day pertaining to estimated gas
receipts by receipt point, necessary minimum flows at each receipt
point, estimated system send out, estimated storage injections and
withdrawals, and estimated day-end system underground storage.
Actual data on gas receipts and net storage injections and
withdrawals are to be posted within one hour. Condition 22-V
requires SoCalGas to post daily similar following next-day
information, including capacity available at each receipt point,
total confirmed nominations by receipt point, estimated system
storage injections and withdrawals, estimated as-available storage
capacity, and the status of system balancing rules.
Neither SoCal Edison nor Imperial criticize these conditions
as inadequate to comply with the requirement that SoCalGas
disclose its plan to use pipeline capacity to fill storage. We
also note that in their motion for a supplemental order, the
Applicants stated that under a Supplemental Affiliate Transactions
Compliance Plan filed with the California Commission on January
30, 1998, they will begin posting on the EBB use of pipeline
capacity to fill storage no later than May 1, 1998. Accordingly,
the Commission finds that the conditions comply with our
requirement.
D. Compliance Issues: Whether Divestiture Proposal is
Adequate
In their answers to the Applicants' compliance filing, SoCal
Edison and Imperial have refocused their arguments on the
deficiencies of the divestiture requirements in the DOJ Consent
Decree and California Commission Decision. They argue that relying
on divestiture of SDG&E's in-state generation focuses only on
incentives for exercising vertical market power associated with
owning gas-fired generation in California and ignores other gas-
fired generation. For example, Energy Pacific's interest in the
480 megawatt gas-fired El Dorado Energy merchant power plant
currently under construction in Nevada, coupled with the
acquisition of other generation by the merged company allowed
under the DOJ Consent Decree, may restore the capability of the
merged company to leverage SoCalGas's Southern California gas
monopoly into electricity markets. n75
n75 Imperial filing of April 22, 1998 at 5. SoCal Edison filing of
April 22, 1998 at 6 and 12.
SoCal Edison argues further that the conditions address only
one facet of the merged company's ability to exercise vertical
market power, its ability to discriminate in favor of affiliated
customers through preferential treatment or access to
competitively sensitive information. SoCal Edison voiced this same
concern on rehearing, arguing that the Commission has not
addressed the merged company's ability to manipulate gas prices
and delivery (and therefore electricity prices) through its
monopoly over gas transmission, storage and distribution in
Southern California without overtly discriminating against non-
affiliated users. n76
n76 SoCal Edison filing of April 22, 1998 at 10.
Imperial argues that the behavioral remedies discussed in the
Merger Order require transaction-by-transaction oversight, which
could prove difficult. Behavioral regulation does not limit the
incentives for the merged company to exercise market power. To
remedy the inadequacy of the divestiture requirement, Imperial
asks that the Commission preclude the merged company's acquisition
of generating resources beyond a specified "cap" capable of being
bid into the PX, pending the effective implementation of
structural changes in California. n77 SoCal Edison argues that the
appropriate additional remedy is the requirement that Pacific's
intrastate gas transportation and storage assets be turned over to
a third party with no interests in southern California electricity
markets. n78
n77 Imperial filing of April 22, 1998 at 3-6.
n78 SoCal Edison filing of April 22, 1998 at 19.
Imperial also challenges the Applicants' claim that the
planned divestiture of SDG&E's gas-fired generation would
eliminate the market problems raised by the merger. It argues that
the merged company could still acquire other gas-fired generation,
citing the merged company's existing plans for acquiring such
generation that is capable of being bid into the PX. This
Commission should set a cap on such future acquisitions.
As we explained in the Merger Order, a vertical merger is
unlikely to impair competition unless the merged company has the
incentive and ability to affect prices or quantities in the
upstream and downstream markets. n79 This incentive substantially
depends on the amount and type of generating capacity owned or
controlled by the merged company. For example, the profitability
of raising rival generators' delivered gas costs depends both on
the revenues SoCalGas forgoes in the upstream market from
withholding gas or raising those generators' delivered gas costs
and the revenues acquired in the downstream market through higher
electricity prices. After SDG&E's gas-fired plants are divested,
with less marginal and inframarginal capacity on which to collect
higher downstream revenues, the incentive to raise rivals' costs
will be diminished.
n79 79 FERC at 62,561.
As noted in our Merger Order, divestiture of SDG&E's gas-
fired generation plants is another method of eliminating the
vertical market power problem. n80 In our view, divestiture
substantially lessens the incentive to exercise market power
through raising rivals' costs. The merged company has other
generation interests and can, under the divestiture requirement,
acquire additional generation outside California. However, the
Commission does not believe that such interests provide the same
incentive the merged company would have to raise its rivals' costs
as is provided by ownership of the amount and type of SDG&E's
generation. Thus, we do not agree with Imperial's argument that a
capacity cap is necessary.
n80 79 FERC at n. 58.
As to SoCal Edison's proposed remedy, we reiterate that the
divestiture requirement would largely reduce the incentive for the
merged company to raise electricity prices by raising gas prices.
Moreover, we note that the divestiture was a condition required by
DOJ, one of two federal antitrust agencies. n81
n81 Gulf States Utilities Company v. FPC, 411 U.S. 747 (1973)
(Commission does not implement antitrust laws, though it must
consider antitrust implications of matters before it).
E. Whether It Is Necessary to Convene A Trial-Type Evidentiary
Hearing
SoCal Edison and others argue that the Commission should have
convened a trial-type hearing so that the parties could conduct
discovery to identify the various ways in which the merged company
could exercise market power and to explore what remedies would
work. n82 They say that the courts require us to conduct a hearing
when a case involves anticompetitive consequences. n83 SoCal
Edison also argues that this Commission must conduct an
independent investigation examining whether the conditions imposed
by the California Commission and by DOJ will remedy the market
power problems raised by the proposed merger. It says again that
we should convene a trial-type hearing before an administrative
law judge. n84 SoCal Edison claims that no agency, including this
Commission, has examined the evidence to determine the measures
necessary to eliminate vertical market power concerns. It says
that a hearing is necessary for the Commission to develop an
evidentiary basis upon which to conclude (as is the Commission's
responsibility) that the conditions articulated in our Merger
Order will remedy the vertical market power created by the merger.
A hearing, they assert, would allow the Commission to judge the
efficacy of the conditions imposed by the California Commission
and explore whether additional remedies, including structural
modification, are needed to mitigate the anticompetitive concerns
not resolved by that Commission.
n82 SoCal Edison's Request for Rehearing at 26-31.
n83 Id. at 27-28, citing City of Huntingtonberg v. FERC, 498 F. 2d
778, 779 (D.C. Cir. 1974); Michigan Public Power Agency v. FERC,
963 F.2d 1574, 1581 (D.C. Cir. 1972); Gulf State Utilities Co. v.
FPC, 411 U.S. 747, 763 (1973); Cajun Electric Power Cooperative,
Inc., v. FERC (Cajun), 28 F.3d 173 (D.C. Cir. 1994).
n84 Id. at 15-18.
We do not agree. It is well established that we are required
to hold an evidentiary hearing only when there is a genuine issue
of material fact, and even where there is such an issue, we need
not hold an evidentiary hearing where the issue can be resolved
based upon a written record. n85 SoCal Edison thus puts the cart
before the horse with its argument that we must hold a hearing "to
allow the parties to conduct discovery to identify the full range
of anticompetitive mechanisms" n86 the merged company could use. A
trial-type hearing is not required in order to permit parties the
opportunity to uncover factual disputes.
n85 Cajun, 28 F.3d at 177; Louisiana Energy and Power Authority v.
FERC, No. 97-1098 (D.C. Cir., April 24, 1998).
n86 Filing of July 25, 1997 at 26.
SoCal Edison claims that we must "ordinarily" convene an
evidentiary hearing in cases of mergers that may have
anticompetitive effects. n87 It argues that the record is
insufficient for us to issue final approval, claiming that we have
not "conducted any independent investigation" into whether the
various changes in circumstances that occurred after our Merger
Order resolve the concerns we raised in that order. n88 SoCal
Edison appears to argue that the only way to conduct an adequate
investigation is to convene a trial-type hearing.
n87 Id. at 28, citing, e.g., City of Huntingtonberg v. FERC, 498
F.2d 778, 779 (D.C. Cir. 1974); Michigan Public Power Agency v.
FERC, 963 F.2d 1574, 1581 (D.C. Cir. 1992); Gulf State Utilities
Co., v. FPC, 411 U.S. 747, 760-763 (1973).
n88 Filing of April 22, 1998 at 15-18.
We do not agree that such a hearing is needed or that it is
the only way to carry out an adequate investigation and to make
valid findings. We have solicited comments at every stage of this
proceeding, and SoCal Edison and others have had several
opportunities to present their arguments that the merger is not
consistent with the public interest. We have examined the
conditions imposed by the California Decision, along with all the
other relevant circumstances. We have discussed these
circumstances and the intervenors' arguments concerning these
circumstances at some length in this order. This is a sufficient
basis for our decision.
Moreover, "mere allegations of disputed fact are insufficient
to mandate a hearing; a petitioner must make an adequate proffer
of evidence to support them." n89 Although SoCal Edison claims
that there is "record evidence" that codes of conduct will not
resolve the market power problem, n90 it does not say what that
record evidence is. As the court noted in Cascade Natural Gas
Corp. v. FERC, a hearing is not required in the absence of an
adequate proffer of evidence revealing a material factual dispute,
and even then, the hearing required may be a "paper" hearing. That
case is particularly apt because of the strong parallels with this
one in the kind of arguments raised:
n89 Woolen Mill Association v. FERC, 917 F.2d 589, 592 (D.C. Cir.
1990).
n90 Filing of July 25, 1998 at 26.
while petitioners claimed in general terms the theories upon which
they claimed unfair competition and undue discrimination, the
Commission and other parties responded in kind. There were no
underlying disputes over specific material facts that required a
hearing. n91
n91 955 F.2d 1412, 1425-6 (10th Cir. 1992). Also see Amador Stage
Lines, Inc. v. U.S., 685 F.2d 333, 335 (9th Cir. 1982) (material
issue raised, but paper rather than evidentiary hearing
sufficient), and Cities of Batavia, et al. v. FERC, 672 F.2d 64,
91 (D.C. Cir. 1982) (same).
The cases cited by these intervenors do not support the
proposition that competitive issues must be decided based on
evidentiary hearing -- in fact, summary disposition, as well as
paper hearing procedures, can be acceptable. Huntingtonberg
specifically left it up to the Commission to decide the nature of
the further procedures ordered on remand, noting only that "some
form of hearing" was needed. n92 The Michigan case raised the
question of whether summary disposition -- disposition with no
hearing -- was appropriate. In fact, the court found that summary
disposition of allegations of anticompetitive behavior was
acceptable. SoCal Edison quotes the court's statement that the
Commission must hold a hearing when an application presents an
"obviously direct and anticompetitive risk...." However, the court
in Michigan did not say that a paper hearing could not be
adequate. Similarly, in Gulf States the Supreme Court said that
summary disposition of allegations of anticompetitive behavior
could be acceptable as long as the agency explains why summary
disposition is warranted.
n92 498 F.2d at 789.
The Commission orders:
(A) The requests for rehearing are hereby denied.
(B) The Applicants' proposed disposition of facilities is
hereby approved, as revised with respect to the restrictions on
abuses of affiliated relationships, as discussed in the body of
this order.
(C) Within 30 days after issuance of this order, the Applicants
shall file revisions to their codes of conduct and restrictions on
the sharing of information, as discussed in the body of this
order.
By the Commission.
(SEAL)
/s/ Linwood A. Watson Jr.
Linwood A. Watson, Jr.
Acting Secretary