E-19: Commissioner James Danly Dissent Regarding Louisville Gas and Electric Company and Kentucky Utilities Company

Commissioner James Danly Statement
May 18, 2023
Docket Nos. EC98-2-005 and ER18-2162-004

I dissent from today’s order, which imposes a requirement that exceeds the Commission’s authority under Federal Power Act (FPA) section 203.[1]  In order to understand why, it will be necessary to delve into the background of this proceeding.

In 1998, the Commission approved the proposed merger between Louisville Gas and Electric Company (LG&E) and Kentucky Utilities Company (KU) (1998 Merger).[2]  Prior to the 1998 Merger, neither LG&E nor KU were members of the Midwest Independent Transmission System Operator, Inc. (MISO),[3] which at the time had been proposed but had not yet been approved by the Commission.  As a result, transmission rates for transmission of power to LG&E or KU from any of the entities that now are in MISO were pancaked, as were the transmission rates between LG&E and KU.

As part of their merger application, LG&E and KU proposed to combine their transmission facilities and to charge a single rate for transmission.[4]  This had the effect of de-pancaking rates for transmission from one company’s system to the other’s.  This transmission rate de-pancaking between LG&E and KU was not terminated by the Commission and remains in effect today.

In approving the 1998 Merger, the Commission conditioned its approval on LG&E and KU joining MISO when it was formed.[5]  Although that condition would have the beneficial rate effect of depancaking transmission rates for transmission to and from other MISO utilities to the merged company’s system when MISO commenced operations, the condition was not imposed for that reason.  Rather, the Commission imposed this requirement to ensure that the 1998 Merger did not have an adverse effect on competition.[6]  Nor could the requirement have been imposed to address effects on rates because, before the 1998 Merger, transmission rates for transmission from the other MISO utilities to LG&E and KU were pancaked.

In December of 2001, MISO commenced operations.[7]  At that time, transmission rates between LG&E and KU and other MISO utilities were depancaked.  Keep in mind that this depancaking took place after the 1998 Merger, and was completely unrelated.

In 2006, the Commission approved LG&E and KU’s withdrawal from MISO.[8]  As part of its approval, the Commission imposed the depancaking condition that is the subject of this remand proceeding.[9]  However, that condition was not imposed to address any rate effects of the 1998 Merger, but because the condition “will address our concerns regarding horizontal market power.”[10]  Nor could depancaking have been imposed to address the rate effects of the 1998 Merger because transmission rates were not depancaked until well after that merger, for completely unrelated reasons.  Thus, it could not have been necessary to prevent merger-related rate increases.

In 2019, the Commission approved the termination of depancaking, finding that it was no longer necessary to retain the condition to ensure that the 1998 Merger would not affect competition.[11]  The Commission stated that, because the mitigation was implemented to remedy a horizontal market power concern, in evaluating the removal of the depancaking condition, the Commission would only consider the effect of the removal on horizontal competition, rather than on all of the factors the Commission traditionally considers when evaluating applications under FPA section 203(a).[12]  On appeal, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) upheld the Commission’s finding that terminating the depancaking condition did not then cause the 1998 Merger to have negative effects on competition, but held that the Commission must also consider the effects of terminating the depancaking condition on rates.[13]

The Commission’s inquiry on remand should be straightforward.  “When the Commission reviews a proposed transaction’s effect on rates, the Commission’s focus is on the effect the proposed transaction itself will have on rates, whether that effect is adverse, and whether any adverse effect will be offset or mitigated by benefits that are likely to result from the proposed transaction.”[14]  This is a common-sense approach to the application of the effect on rates component of the Commission’s review of mergers under FPA section 203, which requires that the Commission consider whether a “proposed transaction will be consistent with the public interest.”[15]

Today’s order, however, ignores this requirement.  Instead of considering whether termination of the depancaking condition would cause the merger to affect rates, as required by the statute, the Commission focuses solely on whether terminating the depancaking condition itself “has an adverse effect on rates.”[16]  In other words, the Commission “will compare rates prior to the [termination of depancaking] (i.e., depancaked rates implemented through RS 402) to those that will exist after implementation of the [termination of depancaking] (i.e., repancaked rates) to determine the effect on rates and whether the LG&E and KU merger can continue to be found consistent with the public interest.”[17]

The Commission has provided three justifications for divorcing its consideration of the rate consequences of terminating the depancaking condition from its consideration of the effects of the 1998 Merger, to which the depancaking condition was attached.  None of those justifications have any merit.  First, the D.C. Circuit did not hold, as the Commission suggests, that the Commission should ignore whether the depancaking condition was necessary to ensure that the 1998 Merger does not affect rates,[18] but only required the Commission to “reconsider its decision.”[19]  Second, although the Commission correctly notes that the depancaking condition was not imposed in the 1998 Merger Order, it fails to explain why that matters.[20]  Third, the Commission similarly provides no explanation of the significance of its final justification: “[A] specific provision on standard for review was included in RS 402 that states:  ‘Any proposed changes to these requirements are governed by Section 203 of the FPA.’” [21]

If the termination of the rate depancaking condition were evaluated, as it should be, based solely upon the termination’s impact on the rate effects of the 1998 Merger, then the termination of that condition must be upheld.  Put simply:  the termination of depancaking cannot cause a rate increase to result from the 1998 Merger because the rates for transmission from the MISO utilities to LG&E and KU were pancaked prior to that merger, just as they are after termination of the condition.  Indeed, far from causing rates to increase, the 1998 Merger continues to have the beneficial rate effect of depancaking transmission rates between what were then LG&E’s and KU’s transmission systems.  Rather, the depancaking condition was relevant only to the effect of the 1998 Merger on competition, and the D.C. Circuit upheld the Commission’s conclusion that the condition was no longer required for this purpose.[22]

True, termination of the de-pancaking condition will cause an increase in rates for transmission between MISO utilities and LG&E and KU, but that is an increase from the non-pancaked rates that went into effect when MISO commenced operations a few years after the 1998 Merger was consummated, for reasons unrelated to the merger.  Termination of the depancaking condition simply restores some, but not all, of the pancaked rates that were in effect at the time of the merger and continued to be in effect until MISO commenced operations in 2001.  This increase did not result from the 1998 Merger and, as previously noted, the effect-on-rates element of Commission’s merger analysis protects customers only from “the effect the proposed transaction itself will have on rates.”[23]

For these reasons, I respectfully dissent.