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EXHIBIT 99.3
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
and Donald F. Santa, Jr.
NorAm Energy Services, Inc. ) Docket No. EC97-24-000
)
NorAm Energy Services, Inc. ) Docket No. ER94-1247-010
ORDER APPROVING DISPOSITION
OF JURISDICTIONAL FACILITIES AND
ACCEPTING FOR FILING CODE OF CONDUCT, AS MODIFIED
(Issued July 30, 1997)
On March 27, 1997, NorAm Energy Services, Inc. (NorAm), a power
marketer authorized to sell power at wholesale at market-based rates, (1) filed
an application pursuant to section 203 of the Federal Power Act (FPA) (2) for
an order approving the merger of NorAm's parent company, NorAm Energy
Corporation (NorAm Energy), which is principally engaged in the distribution
and transmission of natural gas, with: (1) Houston Industries, Inc. (Houston
Industries), an exempt holding company; and (2) Houston Industries' subsidiary,
Houston Lighting & Power Company (HL&P), an electric utility located in the
Electric Reliability Council of Texas (ERCOT) engaged in the generation,
transmission, distribution, and sale of electric energy within the State of
Texas.
On April 30, 1997, the Commission issued an order in Docket No.
EL97-25-000 (3) asserting jurisdiction over the disposition of the
jurisdictional facilities of NorAm that would occur as a
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(1) NorAm Energy Services, Inc., Docket No. ER94-1247-000, Letter Order
(issued July 25, 1996) (unpublished).
(2) 16 U.S.C. # 824b (1994).
(3) NorAm Energy Services, Inc., 79 FERC 61,108 (1997), reh'g pending
(April 30 Order). The Commission initiated its jurisdictional inquiry
concerning the proposed merger by order issued on February 5, 1997.
NorAm Energy Services, Inc., 78 FERC 61,111 (1997).
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consequence of the merger of NorAm Energy and Houston Industries and HL&P. (4)
While the Commission's jurisdictional inquiry was pending, NorAm filed the
instant merger application conditioned upon the Commission asserting
jurisdiction over the merger.
As discussed more fully below, the proposed corporate realignment
involves the disposition of NorAm's jurisdictional facilities. We conclude
that it is unlikely that the proposed disposition of NorAm's facilities will
create or enhance horizontal or vertical market power in the most relevant
market, i.e., the wholesale generation market within ERCOT. Therefore, we will
approve the proposed disposition of facilities, as discussed below. We will
also accept NorAm's proposed code of conduct, as modified by this order.
I. Description of the Corporate Realignment, Participants, and Contents
of the Application
A. Description of Corporate Realignment Participants
1. NorAm Energy and Its Affiliates
NorAm, a wholly-owned subsidiary of NorAm Energy, is a wholesale
electric power marketer. It also engages in wholesale gas marketing. NorAm
makes wholesale electric power sales at market-based rates in both interstate
and intrastate commerce. The application states that NorAm owns no generation
or transmission assets and is not party to any contracts that would give it the
ability to control energy generation or transmission in any way.
NorAm Energy also owns interstate gas transmission companies that
originate in Texas, Oklahoma, Arkansas, and Louisiana. (5) These are NorAm Gas
Transmission Co. (NGT) and Mississippi River Transmission Corp. (MRT). Both
NGT and MRT are open-access pipelines and are regulated by the Commission.
Only a minor quantity of their sales is to customers within ERCOT.
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(4) In that order, the Commission noted that it was not exercising
jurisdiction over the merger between NorAm Energy and Houston
Industries.
(5) The application does not specify where these pipelines operate, but it
states that they deliver gas to customers, which, with a few
insignificant exceptions, are located outside of ERCOT. Application,
Vol. 1, Attachment 1 (Affidavit of Dr. Pace), p. 11.
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NorAm Energy's intrastate retail operations include three gas local
distribution companies (LDCs) -- Arkla, Minnegasco, and Entex -- plus two
intrastate pipelines, Unit Gas Transmission Company (Unit Gas) and Industrial
Gas Supply Corporation (IGS). Entex serves very much the same service area as
the electric service territory of HL&P. Arkla's service territory is in
Arkansas, Louisiana, and Texas (outside ERCOT). Minnegasco serves an area
entirely in Minnesota. The two intrastate pipelines serve large-volume
customers within ERCOT but do not serve any electric generators connected to
ERCOT.
NorAm also owns a small gas gathering operation, NorAm Field Services,
that amounts to 2.9 percent of its total business.
2. Houston Industries and Its Affiliates
As noted, Houston Industries is an exempt holding company under the
Public Utility Holding Company Act of 1935 (PUHCA). HL&P, the principal
subsidiary of Houston Industries, is a member of ERCOT and is also
interconnected with the Southwest Power Pool (SPP). HL&P is a traditional
electric generation, transmission, and distribution company, but it is not a
public utility under the FPA. Its open access transmission and wholesale
transactions are regulated principally by the Public Utility Commission of
Texas (Texas Commission). HL&P has a "to, from, and over" (TFO) tariff on file
with the Commission for high voltage direct current (HVDC) transmission service
between ERCOT and SPP. HL&P has recently filed a revised tariff application to
reflect changes in the pro forma tariff adopted in Order No. 888-A. (6)
Houston Industries has two other subsidiaries, Houston Industries
Energy (HI Energy) and HI Power Generation. HI Energy owns interests in
foreign utilities, foreign exempt wholesale generators, and two qualifying
facilities. HI Power Generation's purpose is to invest in domestic generation
projects; it had no investments as of the date of NorAm's application.
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(6) See Promoting Wholesale Competition Through Open Access
Nondiscriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities, 62
Fed. Reg. 12,274 (March 14, 1997), FERC Stats. & Regs., Regs.
Preambles 31,048 (1997), reh'g pending.
The Commission conditionally accepted for filing HL&P's current TFO
tariff by order issued on November 1, 1996 in Docket No.
ER96-2960-000, Houston Lighting & Power Company, 77 FERC 61,113
(1996). On April 11, 1997, as amended on May 23, and June 20, 1997,
HL&P filed a revised TFO tariff to reflect changes in the pro forma
tariff in Order No. 888-A.
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B. Description of the Corporate Realignment
Under the proposed merger, Houston Industries would be merged into
HL&P; HL&P, renamed Houston Industries, Inc. (New Houston Industries), would be
the surviving corporation. NorAm Energy would then be merged into HI Merger,
Inc. (HI Merger), a wholly-owned subsidiary of New Houston Industries; HI
Merger, renamed NorAm Energy Corporation (New NorAm Energy), would be the
surviving corporation. As a result, New Houston Industries would be the parent
company, with HL&P operating as a division of New Houston Industries, and HI
Energy and New NorAm Energy as subsidiaries. NorAm thus would become a second-
tier, wholly owned subsidiary of New Houston Industries and a wholly-owned
subsidiary of New NorAm Energy. (7)
NorAm states that to date, Houston Industries and NorAm Energy have
received all the necessary state and local approvals required to close the
transaction, including approvals from the state commissions of Arkansas,
Louisiana, Minnesota, Mississippi, and Oklahoma and from various
municipalities. In addition, NorAm states that the merging parties,
application to the SEC for an exemption from the registration requirement under
PUHCA is unopposed, and the United States Department of Justice (DOJ) concluded
its investigation of the proposed merger without raising any concerns.
II. Notice of Filing and Interventions
Notice of NorAm's application was published in the Federal Register,
(8) with protests or motions to intervene due on or before May 27, 1997.
Notices of intervention raising no substantive issues were filed by the
Arkansas Public Service Commission (Arkansas Commission) and the Mississippi
Public Service Commission (Mississippi Commission). Timely motions to
intervene raising no substantive issues were filed by Southern Union Gas
Company (Southern Union) and Electric Clearinghouse, Inc. (Clearinghouse).
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(7) NorAm states that if the Securities and Exchange Commission (SEC) does
not find that the merged entity will qualify for exemption from
registration under section 3 of PUHCA, then alternative merger plans
would be used to effect the merger of the companies. Under one
alternative merger plan, NorAm Energy would be merged into a Houston
Industries subsidiary, with the Houston Industries subsidiary as the
surviving company. Under the other alternative, NorAm Energy and
Houston Industries would be merged with and into HL&P, with HL&P as
the surviving corporation.
(8) 62 Fed. Reg. 16,801 (1997).
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The Texas Commission filed a notice of intervention stating that it is
investigating whether it has any authority over the corporate restructuring or
merger under state law and whether the merger may tend to restrict or impair
competition in Texas.
On June 6, 1997, Anoka Electric Cooperative (Anoka) filed a motion to
intervene out of time raising no substantive issues.
III. Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure, (9) the notices of intervention and timely, unopposed motions to
intervene serve to make the Arkansas Commission, the Mississippi Commission,
the Texas Commission, Southern Gas and Clearinghouse parties to this
proceeding. Further, due to the early stage of this proceeding and the absence
of any undue prejudice or delay, we will grant the late, unopposed motion to
intervene of Anoka.
B. Standard of Review Under Section 203 of the FPA
1. Statutory Criteria
Section 203 of the FPA reads in pertinent part:
(a) No public utility shall sell, lease, or otherwise
dispose of the whole of its facilities subject to the
jurisdiction of the Commission, or any part thereof of a value
in excess of $50,000, or by any means whatsoever, directly or
indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire,
or take any security of any other public utility, without
first having secured an order of the Commission authorizing it
to do so. . . . After notice and opportunity for hearing, if
the Commission finds that the proposed disposition,
consolidation, acquisition, or control will be consistent with
the public interest, it shall approve the same.
(b) The Commission may grant any application for an order
under this section in whole or in part and upon such terms and
conditions as it finds necessary or appropriate to secure the
maintenance of
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(9) 18 C.F.R. # 385.214 (1996).
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adequate service and the coordination in the public interest
of facilities subject to the jurisdiction of the Commission.
The Commission may from time to time for good cause shown make
such orders supplemental to any order made under this section
as it may find necessary or appropriate.
2. Merger Policy Statement
The Commission's Merger Policy Statement (10) sets forth the criteria
and considerations for evaluating applications under section 203. The
Commission examines three factors in analyzing whether a merger is consistent
with the public interest: the effect on competition; the effect on rates; and
the effect on regulation. (11) The Merger Policy Statement also recognized that
new forms of mergers would occur as a result of the changes in the industry:
[A]s the industry evolves to meet the challenges of a
more competitive marketplace, new types of mergers
and consolidations will be proposed. For example, in
addition to mergers between public utilities, market
participants already are considering restructuring
options that include mergers between public utilities
and natural gas distributors and pipelines,
consolidations of electric power marketer businesses
with other electric or gas marketer businesses, and
combinations of jurisdictional electric operations
with other energy services. As a consequence, our
merger policy must be sufficiently flexible to
accommodate the review of these new and innovative
business combinations that are subject to our
jurisdiction under section 203 and to determine their
implications on competitive markets. We believe that
the analytical framework in this Policy Statement
provides a suitable methodology for determining
whether such mergers will be consistent with the
public interest. [(12)]
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(10) Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (Dec.
30, 1996), FERC Stats. & Regs. 31,044 (1996) (Merger Policy
Statement), order on reconsideration, Order No. 592-A, 62 Fed. Reg.
33,341 (1997), 79 FERC 61,321 (1997).
(11) Merger Policy Statement at 30, 111.
(12) Merger Policy Statement at 30,113 (footnotes omitted).
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C. Evaluation of the Proposed Disposition of Facilities
1. Jurisdiction
As noted above, on April 30, 1997, the Commission issued an order in
which it determined that the corporate realignment of NorAm Energy and Houston
Industries would result in the disposition (via a transfer of control) of the
jurisdictional facilities of NorAm, which requires Commission authorization
under section 203 of the FPA. (13)
2. Effect on Competition
In the Merger Policy Statement, the Commission adopted the DOJ and
Federal Trade Commission (FTC) Horizontal Merger Guidelines (Guidelines) as the
analytical framework for evaluating the effect of a proposed merger on
competition. (14) Our analysis of the competitive issues follows the general
framework in the Merger Policy Statement and our specific framework for
evaluating market power arising from vertical mergers first enunciated in San
Diego Gas & Electric Company and Enova Energy, Inc., 79 FERC 61,372 (1997)
(Enova).
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(13) Because we have already determined that the Commission has
jurisdiction over the proposed transaction under section 203 of the
FPA by virtue of the proposed disposition of NorAm's jurisdictional
facilities, we do not need to reach the question of whether the
proposed transaction also involves a direct or indirect merger or
consolidation of NorAm's jurisdictional facilities with those of any
other person.
(14) The Guidelines set out five steps for merger analysis: (1) define the
markets likely to be affected by the merger and measure the
concentration and the increase in concentration in those markets; (2)
evaluate whether the extent of concentration and other factors that
characterize the market raise concerns about potential adverse
competitive effects; (3) assess whether entry would be timely, likely,
and sufficient to deter or counteract any such concern; (4) assess any
efficiency gains that reasonably cannot be achieved by other means;
and (5) assess whether either party to the merger would be likely to
fail without the merger, causing its assets to exit the market.
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a. Horizontal Market Power Issues
The three potential horizontal market power concerns are: (1) whether
the consolidation of HL&P's generating facilities with NorAm's electricity
marketing activities will result in enhanced market power for the merged
company in wholesale generation markets; (2) whether the merger will lead to
increased opportunities for the exercise of transmission market power; and (3)
whether the consolidation of HL&P's electric retail franchise with Entex's gas
retail franchise will result in enhanced market power for the merged company in
the end use energy services market.
Generation Market Power
In the Merger Policy Statement, the Commission stated that:
it will not be necessary for the merger applicants to perform
the screen analysis or file the data needed for the screen
analysis in cases where the merging firms do not have
facilities or sell relevant products in common geographic
markets. In these cases, the proposed merger will not have an
adverse competitive impact (i.e., there can be no increase in
the applicants' market power unless they are selling relevant
products in the same geographic markets) so there is no need
for a detailed data analysis. [(15)]
NorAm generally followed the Merger Policy Statement's Appendix A analytical
framework although, in light of the factual circumstances of this case, NorAm
did not fully explore certain aspects of the Appendix A analysis. (16) We
find that this was an appropriate approach in this case, and we have relied on
the information contained in the application to reach the conclusions set forth
herein. (17)
NorAm's witness, Dr. Pace, contends that this merger raises no
horizontal market power issues in the short-term capacity, long-term capacity,
or the non-firm energy markets. He looked at
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(15) Merger Policy Statement at 30,113.
(16) Because NorAm owns no generation, as described below, Dr. Pace only
analyzed non-firm energy market concentration before and after the
merger. See Application, Vol. 1, Attachment 1 (Affidavit of Dr.
Pace), p. 14-16.
(17) See, e.g., Duke Power Company and PanEnergy Corp., 79 FERC 61,236
at 62,037 (1997) (Duke/PanEnergy).
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two geographic markets: the HL&P service area and ERCOT. (18) He
calculates a zero or negligible change in the Herfindahl-Hirschman Index (HHI)
(19) from the merger in any of these markets. His general conclusion is that
adding NorAm Energy's marketing activity (through NorAm) would have no effect
on HL&P's market position because: (1) NorAm controls no generation or
transmission facilities, physically or contractually; (2) NorAm's first sales
in the ERCOT territory were in 1996 and are estimated to comprise less than one
percent of the non-firm energy market in ERCOT; and (3) the electric power
marketing business is easy to enter.
Our concern is whether the consolidation of HL&P's generating
facilities with NorAm's power marketing activities will enhance the ability of
the merged company to exercise market power in the relevant product market.
NorAm's analysis supports the conclusion that the proposed corporate
realignment will not contribute to an increase in generation market power. We
agree, and note that no party has offered evidence contradicting this
conclusion. Our conclusion is based on the following evidence and analysis.
While we do not necessarily agree with NorAm concerning the definition
of the relevant product market or the concentration analysis performed by Dr.
Pace, we accept NorAm's representation that it does not own or control
generation resources by virtue of its purchase power contracts or its
interconnection agreements with entities from which it buys power. NorAm
states that if it tried to withhold generation that it had under purchase
contracts from other sellers in order to exercise market power, the seller
would be free to sell the generation. Thus, NorAm states that its contracts do
not give it the ability to withhold generation from the market. No one
disputes this assertion. Therefore, we find that the consolidation of HL&P's
generation resources with NorAm's power marketing activities will not enhance
generation market power.
Transmission Market Power
We find that the proposed merger will not result in increased
transmission market power. NorAm does not own or control any transmission
facilities, and the proposed transaction therefore will have no effect on
control of transmission.
We also note that transmission service provided by HL&P within
ERCOT is provided under a tariff regulated by the Texas Commission. This
service is subject to the open access
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(18) Dr. Pace states that he "adopted this truncated approach rather than
going through all the steps of a detailed delivered price analysis
since NorAm neither owns nor controls any generation or electric
transmission facilities." Application, Vol. 1, Attachment 1, p. 14.
(19) The HHI is a measure of market concentration.
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requirements of the Texas Commission, which requires utilities within ERCOT to
offer third parties open access transmission services at rates, and on terms
and conditions, comparable to those available to the transmission-owning
utilities. In addition to service within ERCOT, HL&P also provides
transmission service to, from and over the HVDC interties with the Southwest
Power Pool (SPP) under its TFO tariff.
Gas-Electric Competition in End Use Markets
Competition between gas and electricity occurs primarily in retail
markets. The proposed transaction can change the incentive and ability to
discourage the substitution by end users of one fuel (gas or electricity) for
the other. Here, there is almost complete overlap between HL&P's retail
electricity franchise service territory and Entex's retail gas franchise
service territory. After the merger, the merged firm will be the single
supplier of both gas and electricity in the Houston area. As such, the merged
company will be able to discourage and possibly prevent the substitution of
whichever fuel is most profitable to the firm's interests to sell or deliver.
However, we emphasize that it is unlikely that such effects of the
transaction at issue here could spill over into wholesale power markets and
affect competition in those markets. Additionally, no state commission has
indicated that it is not capable of addressing retail-related competition
issues or asked us to consider such issues. In these circumstances, we see no
need to further consider this issue in this proceeding.
b. Vertical Market Power Issues
Vertical mergers pose different concerns than horizontal mergers.
While a vertical combination may result in efficiencies from integrating input
and output operations, it may also increase a merged firm's incentives to use
its market position in one segment of its vertically integrated business to
adversely affect competition in a related segment of its business. The
consolidation of facilities in an "upstream," or input, market with facilities
in a "downstream," or output, market raise potential concerns regarding the
vertical effects on market power.
As we have explained in recent orders, (20) the Commission has
developed a framework for evaluating the competitive effects of vertical
mergers. This framework, which is consistent with our Merger Policy Statement,
is informed by the DOJ/FTC approach to evaluating the competitive effects
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(20) See Enova, 79 FERC at _______________, slip op. at 17-24; Destec
Energy, Inc. and NGC Corporation, 79 FERC 61,373 at _______________,
slip op. at 12-17 (1997) (Destec).
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of vertical mergers. (21) However, the Commission's approach to evaluating the
competitive effects of vertical mergers is evolving. Additional experience
will undoubtedly bring new insights to bear in refining our analysis.
Vertical mergers raise three types of general competitive concerns:
(1) denying rival firms access to inputs or raising their input costs; (22) (2)
increased anticompetitive coordination; and (3) regulatory evasion. These
potential actions can affect competition through higher prices or reduced
output in the downstream output market. (23)
As a starting point for evaluating the vertical effects of the
proposed transaction, we have used the basic principles laid out in the 1992
Horizontal Merger Guidelines and adopted in the Commission's Merger Policy
Statement, applied to both the upstream market and downstream wholesale power
market to determine whether those markets are conducive to the exercise of
market power after the merger. The Commission views this approach as the
correct framework in which to evaluate the competitive effects of vertical
mergers. This framework generally includes the following steps: (1) define
relevant product and geographic markets; (2) examine the competitive
circumstances in the upstream market; (3) examine the competitive circumstances
in the downstream market; and (4) determine, based on the circumstances in the
upstream and downstream markets, whether the likely net effect of the merger
would be to significantly raise wholesale electricity prices.
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(21) The 1984 Guidelines, which are incorporated by reference in the 1992
Horizontal Merger Guidelines discussed at length in the Merger Policy
Statement, describe four concerns raised by vertical mergers and the
corresponding basis upon which DOJ would challenge a merger. Those
four concerns are: elimination of potential entrants, barriers to
entry, facilitating collusion, and evasion of rate regulation. The
first two of these concerns can be restated as foreclosure/raising
rivals costs. The third and fourth concerns can be restated as
increased anticompetitive coordination and regulatory evasion,
respectively.
(22) A related concern is denying or giving rival firms limited access to
downstream customers.
(23) For a vertical merger to have a potentially adverse effect on
competition in the wholesale electricity market, resulting in lower
output or higher prices, it is necessary for the downstream market in
which the merging firm controls facilities to be served by the
upstream market in which the merging firm controls inputs or
facilities necessary for delivering those inputs. The upstream market
and downstream wholesale power market generally need to be conducive
to the exercise of market power after the merger. A vertical merger
is unlikely to have an adverse effect on competition unless the merged
company has the incentive and ability to affect prices or quantities
in the upstream and downstream markets. See, e.g., Destec, 79 FERC at
_______, slip op. at 16.
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Relevant Markets
Product Market
NorAm does not identify the relevant product markets in its vertical
analysis, and it does not provide any analysis which could be used to determine
the relevant product markets. For purposes of our vertical analysis, the
relevant product in the upstream market is delivered gas. It is the input
product that the merged company could conceivably exercise some control over
and thereby affect competition in the downstream market.
With respect to the downstream market, for purposes of our analysis,
the relevant product is wholesale electric energy and capacity, because it is
these downstream products that could be affected by the potential exercise of
market power in the upstream delivered gas market. (24)
Geographic Market
NorAm does not identify the geographic market in the discussion of
vertical market power and has not performed a delivered price test which could
be used to define the geographic market. In its analysis of horizontal market
power, NorAm identifies two relevant geographic markets -- HL&P's control area
and ERCOT. We use NorAm's identification of these two geographic markets as a
starting point for determining the appropriate geographic markets for both the
upstream and downstream markets. NorAm identified the HL&P control area as the
smallest plausible geographic market within which HL&P competes to make
wholesale sales. In addition, it is roughly the same geographic area as the
area in which HL&P and Entex's retail franchise service territories overlap.
For these reasons, we will accept the HL&P control area as a relevant
geographic market. NorAm also identified ERCOT as a relevant market because:
all of HL&P's facilities are located within ERCOT; currently, HL&P makes all of
its wholesale sales within ERCOT; and there is open access transmission service
provided by HL&P within ERCOT subject to the jurisdiction of the Texas
Commission. On this basis, we also accept ERCOT as a relevant geographic
market.
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(24) We note that in this case it does not matter whether the relevant
downstream product is specified as electric energy or capacity. As
discussed below, our analysis shows that the merged company is unable
to exercise market power in the upstream delivered gas market, and the
merger therefore will not enhance the merged company's market power
for any conceivable product in the downstream market. As a general
matter, the relevant product in the downstream market includes any
product for which control of inputs in the upstream market could
affect competition.
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Upstream Market: Competitive Conditions
NorAm argues that NorAm Energy is a minor supplier of delivered gas to
gas-fired generators in the relevant geographic markets. In addition, it
argues that in all of Texas, but particularly in the Houston area, the
delivered gas market is highly competitive, and entry into this market is easy.
A number of non-affiliated gas pipelines criss-cross the Gulf Coast of Texas,
including HL&P's service territory, and these pipelines have excess capacity.
Therefore, NorAm Energy companies could not profitably deny access to or raise
the cost of delivered gas to new gas-fired generators that compete with the
merged company in the relevant market, because those new generators would have
significant alternatives to NorAm Energy companies for delivered gas.
We agree with NorAm's analysis for the following reasons. FERC Form
423 data show that NorAm Energy companies are not suppliers for any gas-fired
generators owned by ERCOT electric utilities. (25) Within the HL&P area,
NorAm Energy claims that only one small cogenerator (6.4 mW) in this market
capable of selling power into the grid takes delivered gas service from a NorAm
Energy company (Entex). (26) We therefore conclude that any attempt by the
NorAm Energy companies to restrict delivered gas to wholesale market generators
that could compete with HL&P would be unsuccessful. Because HL&P does not own
or control any gas facilities, the proposed transaction will not change this
situation. We thus have no need to examine entry conditions.
Downstream Markets: Competitive Conditions
Because NorAm Energy cannot exercise market power in the relevant
upstream market, we conclude that the merger does not affect the merged
company's opportunity to exercise market power in the relevant downstream
market.
3. The Effect on Rates
The Merger Policy Statement explains that the protection of wholesale
ratepayers and transmission customers is the Commission's primary concern
regarding the effects of a section 203 transaction on rates. (27) The Merger
Policy Statement also describes various commitments which may, in particular
cases, be an acceptable means of protecting ratepayers, such as hold harmless
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(25) Form 423 collects monthly data on the cost and quality of fossil fuels
delivered to electric generating plants.
(26) The output of this facility is generally consumed by the owner (Rice
University).
(27) See Merger Policy Statement at 30, 123.
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provisions, open seasons for wholesale customers, rate freezes, and/or rate
reductions. (28)
NorAm argues that its market-based rates fluctuate based on market
forces rather than NorAm's underlying costs, and cannot be affected by the
proposed merger. Therefore, it argues that there will be no change in its
rates as a result of the proposed merger. It further argues that no other
jurisdictional rates will be affected by the proposed merger, because: (1) the
merger will not cause, directly or indirectly, the merger or consolidation of
any NorAm Energy facilities with those of any other entity for ratemaking
purposes; (29) (2) HL&P commits not to increase rates for wholesale
transmission service under its TFO tariff for four years following the close of
the merger, thus protecting TFO customers from any merger-related costs; and
(3) regulatory authorities in the various states in which NorAm Energy and HL&P
operate have broad authority to review and set rates for the NorAm Energy and
HL&P utility operations within their jurisdiction and can ensure that the rates
are not adversely affected by the merger.
There will be jurisdictional rates in two sectors of the merged
company that are of concern to us with regard to the proposed transaction.
They are NorAm's rates for electric marketing and the TFO transmission rates of
HL&P.
NorAm charges market-based rates for its electricity marketing. The
application argues correctly that NorAm will only be able to recover market
prices in its rates. (30)
As to HL&P's commitment not to increase its TFO tariff transmission
rates for four years after the completion of the merger, the Commission has
found similar provisions acceptable to protect transmission customers from the
costs of a merger. (31) No party has alleged that such a commitment is an
inadequate protection measure. Therefore, on these facts we find HL&P's
commitment acceptable.
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(28) Id. at 30, 123-24.
(29) As noted supra, we make no determination herein concerning whether the
proposed merger between NorAm Energy and Houston Industries involves
an indirect merger or consolidation under section 203 of the FPA.
(30) See, e.g., Enron, 78 FERC at 61,738 n.45.
(31) See, e.g., Duke/PanEnergy, 79 FERC at 62,039-40.
15
Docket Nos. EC97-24-000
and ER94-1247-010 -15-
4. The Effect on Regulation
By order issued on July 24, 1997, the SEC determined that, after the
Houston Industries-NorAm Energy merger, the newly formed holding company would
be an exempt holding company under PUHCA. (32) Consequently, we find that
federal regulatory authority would not be impaired by the proposed corporate
realignment.
The Merger Policy Statement also expresses concern with the impact of
mergers on state regulatory authority. (33) NorAm states that post-merger,
NorAm Energy and New Houston Industries will continue to be subject to the
jurisdiction of the state commissions and municipalities which currently
exercise jurisdiction over their respective operations, and no regulatory
agency's legal or practical power over the regulated entities will be affected
by the transaction. The Texas Commission, however, said that it "is
investigating whether it has jurisdiction to protect Texas' ratepayers by
determining whether it has authority over the corporate restructuring or merger
under state law." As noted above, although the Texas Commission is
investigating that issue, no state or local regulatory authority, including the
Texas Commission, has asked for our assistance in this regard. Consequently,
we find no need to further investigate this issue.
5. Other Matters
As noted above, NorAm's notice of change of status filing, in Docket
No. ER94-1247-010, contained a proposed code of conduct governing its
relationship with its prospective affiliate HL&P so that NorAm could continue
to make sales at market-based rates. NorAm has included a provision which
provides for the simultaneous disclosure of all non-public market information.
However, NorAm has limited the provision to apply only to HL&P employees
engaged in marketing or transmission service and only to information which HL&P
shares with NorAm. Consistent with UtiliCorp United, Inc., 75 FERC 61,168
(1996), NorAm, shall revise its code of conduct to provide that any
communication between any employee of NorAm and HL&P concerning non-public
market information must be simultaneously communicated to all non-affiliates.
Therefore, we will accept NorAm's proposed code of conduct, as modified above.
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(32) Houston Industries Incorporated, et al., SEC Release Nos. 35-26744,
70- 8907, 1997 SEC LEXIS 1536 (July 24, 1997) (order granting
exemption to holding company pursuant to section 3 (a) (2) of PUHCA)
(33) See Merger Policy Statement at 30,125 (if the state lacks authority to
act on a merger and raises concerns about the effect on regulation,
the Commission may set the issue for hearing; the Commission will
address this issue on a case-by-case basis).
16
Docket Nos. EC97-24-000
and ER94-1247-010 -16-
The Commission orders:
(A) We hereby accept HL&P's commitment not to increase its TFO
tariff transmission rates for four years after the completion of the merger.
(B) The proposed disposition of NorAm's jurisdictional facilities
is hereby approved.
(C) NorAm's code of conduct is hereby accepted for filing, as
modified by this order, effective as of the date of this order, (34) and NorAm
is hereby directed to modify the code of conduct as discussed herein within 30
days.
(D) The Commission retains authority under section 203(b) of the
FPA to issue supplemental orders as appropriate.
(E) The foregoing authorization is without prejudice to the
authority of this Commission or any other regulatory body with respect to
rates, service, accounts, valuation, estimates, determinations of cost, or any
other matter whatsoever now pending or which may come before this Commission.
(F) Nothing in this order shall be construed to imply acquiescence
in any estimate or determination of cost or any valuation of property claimed
or asserted.
(G) NorAm is hereby directed to promptly notify the Commission
when the disposition of jurisdictional facilities is effectuated.
By the Commission.
( S E A L )
/s/ Lois D. Cashell
-------------------------
Lois D. Cashell,
Secretary.
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(34) Rate Schedule Designation:
NorAm Energy Services, Inc.
(1) Rate Schedule FERC No. 1
(2) Supplement No. 1 to Rate Schedule FERC No. 1 (Code of Conduct)