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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. 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. 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. 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. 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. 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.
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