FTC Staff Submits Comments to FERC Regarding Affiliate Codes of Conduct

Staff of the Federal Trade Commission's Bureau of Economics and Office of the General Counsel have submitted comments in support of the Federal Energy Regulatory Commission's (FERC) proposed new standards of conduct for natural gas pipelines and transmitting public utilities (jointly referred to as transmission providers).

The comment notes that the staff of the FTC often analyzes regulatory or legislative proposals that may affect competition within the markets in which electricity and natural gas companies operate, in addition to its review of proposed mergers involving electric and gas utility companies. The Commission previously has authorized the release of two staff reports (July 2000 and September 2001) on electric power market restructuring issues at the wholesale and retail levels. FTC staff has also provided recommendations as to issues states should consider when implementing retail competition programs.

FERC contends that the existing gaps in application of affiliate standards of conduct can be addressed by "consolidating" the electric and gas standards of conduct, broadening the definition of the term "affiliate," narrowing the native load exception applicable to electric utility transmission owners, and applying the standards uniformly to all transmission providers. FERC's proposals also exempt transmission providers that are approved Regional Transmission Organizations (RTOs) from complying with the standards of conduct, but do not necessarily exempt individual members of RTOs if they manage or administer the transmission facilities themselves.

According to the staff comment, it is appropriate and timely for FERC to broaden and unify the coverage of its affiliate standards of conduct due to convergence of the natural gas and electric power industries and the subsequent growing importance of information flows to competition within and between both industries. In four recent investigations of proposed mergers, the FTC found substantial evidence of convergence between fuel markets and electric power markets. This convergence offers opportunities for increased competition between gas and electricity suppliers, but this competition could be limited by mergers or anti-competitive behavior. Some of the risk of anti-competitive behavior spanning the two industries may be avoided by implementing uniform regulatory treatment of electric affiliates of gas utilities and gas affiliates of electric utilities, the comment states.

Currently, FERC's electric transmission open-access policy applies to two types of transmission sales: (1) wholesale sales of unbundled transmission services (i.e., when transmission services are sold by and between wholesale suppliers separately from generation services); and (2) retail sales of unbundled transmission services (i.e., when transmission services are sold independent of generation to retail customers). The open access requirement does not apply when the owner of the transmission facilities is providing bundled service to its native load customers. For this use, the transmission owner may have preference to the transmission grid over non-affiliated entities.

As the staff comment notes, once RTOs are operational and are using market mechanisms to manage transmission congestion to ensure efficient transmission pricing, there will be no need for a native load preference. The staff comment supports FERC's proposal to reign in potential anticompetitive effects of the native load preference by, among other things, ensuring that utility employees responsible for securing native load supplies do not have preferential access to transmission information.

In its comment, the staff agreed with FERC's concern that under some proposed RTO structures, RTO members may have continued incentives and ability to engage in anticompetitive discrimination favoring their energy affiliates. Where proposals with such provisions continue to be made, the staff suggested that FERC may wish to insist that RTOs be fully effective (i.e., independent of transmission owners that also control generation in the same area) and not to accept such proposals, rather than to rely on broader application of affiliate standards of conduct as a remedy. Stronger RTO requirements are more likely to be effective because they more thoroughly remove incentives to engage in anticompetitive discrimination than do the affiliate standards of conduct.

NOTE:  This comment represents the views of the staff of the Bureau of Economics and the Office of the General Counsel of the Federal Trade Commission. They are not necessarily the views of the Federal Trade Commission or any individual Commissioner. The Commission has, however, voted to authorize the staff to submit these comments. The Commission vote was 5-0.

Copies of the staff comment are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC Matter No.: V020001)