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<title>June 2000: Wisconsin Public Service Commission Approves Merchant Plant Rules for Utility Affiliates</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<td width="70%" valign="top"><img src="../images/statelin.gif" alt="STATELINE by Robert Olson" border="0" WIDTH="375" HEIGHT="75"><p><b><u><br>
June 2000</u><br>
</b><font size="5"><b>Wisconsin Public Service Commission Approves Merchant Plant Rules For
Utility Affiliates<br>
</b></font><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
2000/06</em>)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">On May 16, 2000, the Wisconsin
Public Service Commission (WPSC) approved rules requiring utility
affiliates building a wholesale merchant plant in the state to demonstrate
that the plant will not have substantial anticompetitive effects on the
electricity markets for any classes of customers. These rules were
promulgated under a Wisconsin law that became effective May 12, 1998.
Affiliates owning, operating or controlling a wholesale merchant plant in
Grant County before January 1, 1998 are exempt from the Wisconsin law.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Under Wisconsin law, an affiliate of
a public utility is prohibited from owning, controlling or operating a
wholesale merchant plant without WPSC approval. An affiliate must submit
an application for a wholesale merchant plant to the WPSC by the time it
files the required application for a certificate of public convenience and
necessity. The merchant plant application must include either a
"Market Power Screen Analysis" (Analysis) or documentation that
the facility adheres to the provisions of the safe harbor rule regulating
so-called insignificant affiliate participation in the plant. The WPSC
must issue a decision on the application by the earlier of either the date
of issuance of the certificate of public convenience and necessity or 150
days following the WPSC’s receipt of a complete Analysis.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The WPSC must grant the application
if the affiliate meets two conditions: first, the affiliate must have
either transferred control of or divested itself of any transmission
facilities to an independent system administrator; and second, the WPSC
must have determined that the ownership, control, or operation of the
facility will not have a substantial anticompetitive effect on electricity
markets for any classes of customers. This second determination requires
that the WPSC approve any contracts and agreements it is required to
approve under Wisconsin law and also find that the ownership, control, or
operation of the facility will have either no or a minimal potential for
adverse competitive effects, or in the alternative find that the plant
falls under a safe harbor provision. The measure used for determining
"adverse competitive effects" are the guidelines issued by the
Department of Justice and Federal Trade Commission concerning horizontal
mergers (DOJ Guidelines). Certain safe harbor provisions are set forth in
Wisconsin law, which, among others, provides a safe harbor to new
construction (renovations and transfer of ownership are ineligible) where
the affiliate is a passive investor, meaning it does not participate in
plant decisions, or where the affiliate’s combined ownership interest is
less than five percent.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The rules describe the minimum
information requirements for the Analysis. The Analysis must include a
description of the relevant products, including any product substitutes as
viewed from the buyer’s perspective, sold by the affiliate and all of
its affiliates. The relevant products include non-firm energy, short-term
capacity, and long-term capacity (contracts of more than one year), and
any other products which may be created in the emerging competitive energy
market. The analysis must also identify the relevant time periods for
sales of these products. The rules further provide that where there is a
substantial difference in supply and demand over different time periods,
each time period is to be analyzed separately. The Analysis must also
include a definition of the relevant geographic market, which is to
include customers interconnected to the affiliate and wholesale customers
of the affiliate or any of its affiliates during the prior two year
period. Other relevant markets may be identified by the WPSC or the
Federal Energy Regulatory Commission (FERC). Other potential suppliers to
the market and the product they deliver must also be identified and
included in the Analysis if the suppliers can economically and physically
deliver the product, and if the products’ price is no more than five
percent above the pre-transaction market clearing price in the market. The
Analysis must also include market concentration information,
forward-looking projections, regulatory filings with the FERC associated
with the affiliate’s ownership, operation, or control of a wholesale
merchant plant, and any other information helpful under the DOJ Guidelines
principles.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The WPSC may grant the application
even if it finds that there is a moderate to high potential for adverse
competitive effects if it also finds that this adversity can be
counterbalanced by other competitive effects, the possibility of failure
or exiting of assets, or the adversity is mitigated. The WPSC may
condition approval upon the establishment of mitigation remedies it deems
is in the public interest. The WPSC may consider mitigation remedies
raised during the hearing and the mitigation remedies raised in FERC Order
No. 592, a generic order issued on December 18, 1996 setting forth a
policy to use in evaluating whether a proposed merger is consistent with
the public interest. FERC Order No. 592 contains a non-exhaustive list of
potential mitigation remedies, including: expansion of transmission where
limits on transmission capability provides substantial market power to
incumbents; a prohibition from permitting the affiliate to trade over
constrained transmission paths when other transmission service requests
are pending; generation plant divestiture; deferring the establishment of
mitigation remedies to the independent system operator (ISO), who could
control the dispatch of electricity or the prices paid to generators; and
requiring real-time pricing, creating an environment in which market power
is more difficult to exercise. The FERC order also states interim remedial
measures may be implemented while longer-term mitigation measures, such as
construction of new transmission lines, generation divestiture, and ISO
formation, are being effectuated.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The new rules prohibit affiliates
from making firm sales to the utility with which it is affiliated if the
period over which the firm sales is made is for three years or more, or if
either party has an option to extend the period for three years or more.
The WPSC must also approve all sales agreements between utilities and
their affiliates prior to initiation of sales. If the WPSC finds the sale
is not in the public interest, then the WPSC may disallow the utility’s
costs related to the sales or order a refund to customers up to the amount
of the utility’s costs following the WPSC’s initiation of its review.
The rules further provide, however, that the WPSC may not void an
electricity sale if the agreement was approved by the WPSC.</font></p>
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<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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