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FERC member decries order no longer requiring de-pancaked transmission rates

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FERC member decries order no longer requiring de-pancaked transmission rates

A March 21 Federal Energy Regulatory Commission order removing a regulation that prevents a merged company from charging pancaked rates is not supported by the record, one member said.

"While people frequently talk about how the sausage gets made, this case shows how the pancakes get made," Commissioner Cheryl LaFleur said in a dissent. "While a single pancake may be fine, I do not believe that [Louisville Gas and Electric Co. and Kentucky Utilities Co.] should be able to force feed a short stack of pancakes to … customers. Without better ingredients that are presented in this record, the conclusion that these customers have adequate menu alternatives is half-baked at best."

When FERC approved the 1998 merger of Louisville Gas and Electric, or LG&E, and Kentucky Utilities, or KU, it conditioned that approval on the companies continued participation in the Midcontinent ISO in order to mitigate certain horizontal market power concerns in the KU destination market.

However, the merged LG&E/KU in 2006 sought permission to withdraw its transmission facilities from MISO. FERC approved that request, but did so on the condition that LG&E/KU maintain de-pancaked transmission rates in its stand-alone tariff.

LG&E/KU in August 2018 asked FERC to remove the de-pancaked rate condition, claiming that 20 years of market development and the addition of new supply means the condition no longer is needed to mitigate horizontal market power concerns raised by the merger. In particular, the companies said more than 100 suppliers now can reach the destination market at issue and removing the condition will have no impact on market size and market concentration levels.

In approving the request, FERC found that loads located in the LG&E/KU market will continue to have access to a sufficient number of competitive suppliers after the mitigation is removed. Moreover, FERC noted that all transmission customers — other than the Illinois Municipal Energy Agency and the Indiana Municipal Power Agency, which have entered into settlement agreements regarding de-pancaked rates — will pay the same rate for the same service.

Nevertheless, to ensure that certain customers that have relied on de-pancaking mitigation retain access to alternative competitive supply arrangements entered into while the mitigation was in effect, FERC directed LG&E/KU to provide a transition mechanism for those customers.

On a side issue, the commission refused a request to state that it should set time limits on market power mitigation measures placed on mergers and acquisitions. While antitrust agencies may have policies regarding the length of behavioral and structural mitigation, FERC stressed that it operates under different statutory authority. And absent a specific provision in the original merger order setting a mitigation time limit, FERC said it will apply "no specific timing requirements in our consideration of such mitigation."

In her dissent, LaFleur said FERC at least should have built more of a record before deciding whether to grant LG&E/KU's request. That is especially true since a delivered price test shows that removing the rate de-pancaking mitigation results in market power screen failures during certain seasons when the market is highly or moderately concentrated, she said.

"I do not believe that LG&E/KU have provided sufficient support to justify the removal of the rate de-pancaking mitigation," LaFleur wrote. She took particular aim at LG&E/KU's use of results of solicitations conducted with rate de-pancaking mitigation in place to show that plenty of competitive options exist without mitigation.

"In addition, the results of the delivered price test that show how much prices would change without rate de-pancaking are necessarily based on little evidence and I do not find those estimates probative," LaFleur said. She therefore said the matter should have been set for hearing. (FERC dockets EC98-2; ER18-2162)