DOJ and FTC Advocate Broader Approach to FERC’s Market Power Evaluation under Sections 203 and 205 of the Federal Power ActDec 08, 2016
On November 28, 2016, the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) (together, the “Agencies”) submitted comments on the Federal Energy Regulatory Commission’s (the “Commission” or “FERC”) September 22, 2016 Notice of Inquiry (“NOI”), which seeks public comment on possible changes to the Commission’s assessment of market power under sections 203 and 205 of the Federal Power Act (“FPA”).1 The Agencies based their comments on their experience assessing market power effects of mergers, particularly in the electricity markets. FERC’s current approach, they said, overlooks the reality of today’s electricity markets by too narrowly focusing on structural screens (i.e., market share and market concentration). Instead, the Agencies argued FERC should include a broader inquiry into the ability of market participants with relatively small market share to exercise market power.
Observing that it had been nearly ten years since FERC established its approach to MBR authority and nearly twenty years since FERC adopted its current approach to mergers, the Agencies asserted that significant intervening changes in the electricity markets justified significantly revamping FERC’s way of assessing market power.2
The Agencies suggested that FERC de-emphasize its traditional reliance on structural measures–e.g., tests for market share and market concentration–in favor of additional types of evidence better able to detect market power in the electricity markets. According to the Agencies, several unique characteristics render supply and demand inelastic in electricity markets.3 Inelasticity of supply and demand renders these markets particularly susceptible to exercises of market power–even by entities that have relatively low market concentration. The Agencies argued that the potential cost to customers if a market participant were to exercise market power is significant.
The Agencies suggested that adopting the following six recommendations would improve FERC’s market power analysis:
- Add a supply curve analysis to FERC’s examination of mergers under section 203;
- Account for transmission constraints when defining a geographic market to assess market power;
- Make the section 205 market power analysis as consistent as possible with the section 203 analysis;
- Account for incremental acquisitions (including partial acquisitions of assets, such as acquiring additional capacity, or financial interests in another firm);
- Take a more flexible approach to assessing the competitive effects of PPAs; and
- Require that section 203 applicants submit certain merger-related documents.
Supply Curve Analysis
The Agencies advocated that FERC’s primary inquiry under section 203 merger review should be the transaction’s likely competitive effects. They encouraged FERC to adopt a more comprehensive competitive effects analysis that incorporates, but does not rely exclusively upon, a supply curve analysis.4 A supply curve analysis is more effective than FERC’s traditional market concentration thresholds at discerning a merger’s competitive effects, they argued, particularly where the merger may result in or enhance a unilateral exercise of market power, for example, by withholding capacity.
Defining Relevant Geographic Markets
The Agencies pressed FERC to abandon a definition of relevant markets based upon geographic boundaries (such as ISO/RTO or balancing authority area boundaries) in favor of a more flexible analysis. If a geographic market is defined too broadly, the Agencies asserted, FERC’s market concentration tests may fall short of identifying the full scope of an applicant’s market concentration. Conversely, geographic markets that are too narrowly defined may yield inaccurately high market concentration results. The Agencies observed that transmission constraints that are not considered under FERC’s present approach may result in “pockets of demand” in a grid, resulting in relevant geographic markets that are, in reality, much narrower than FERC’s default markets.
De Minimis, Serial and Partial Acquisitions
The Agencies commented that because of the nature of electricity markets, “where the type of capacity acquired by a firm may matter as much for an analysis of competitive effects as the amount of capacity acquired,” FERC should consider more than market concentration. FERC also should consider other evidence to evaluate a merger’s competitive effects.5 FERC’s approach, even in the case of partial acquisitions where both companies remain in the post-transaction market but with different sizes and asset portfolios, should account for the companies’ new positioning in the market and possible incentives to exercise market power. The Agencies also supported the suggestion in the NOI that FERC consider how serial acquisitions may have a cumulative impact on competition.
Power Purchase Agreements
The Agencies stated that FERC’s method of attributing output under PPAs to the purchasing utility’s pre-acquisition market share may render the potential competitive effects undetectable under FERC’s current market screens. Accordingly, the Agencies encouraged FERC to consider collecting additional information from applicants on the duration, renewal, prices, and control provisions of PPAs in order to better assess a PPA’s effects in its section 203 analysis.
Additional Merger-Related Documents
The Agencies recommended that FERC require applicants to submit merger-related documents similar to those submitted to the Agencies. In undertaking their own merger reviews, the Agencies consider evidence of market share and concentration as well as any other “reliable” evidence of a merger’s competitive effects.6
The Agencies encouraged FERC to collect merger-related information in the “stepwise fashion” they follow in their own merger reviews,7 encouraging FERC to consider how it might use its own investigatory authority to obtain evidence from the merging parties and other market participants. Moreover, the Agencies suggested that FERC may rely on information collected and analyzed by FERC’s Division of Energy Market Oversight to evaluate the competitive effects of a proposed transaction.
To the extent that such evidence is proprietary, confidential, competitively sensitive or otherwise protected, the Agencies noted that FERC has adequate rules in place to protect the information. The Agencies also pointed out that requiring this information may not impose significant additional costs on applicants because they already maintain much of the relevant information. The Agencies acknowledged that FERC, too, would incur additional costs such as the need for additional staff devoted to reviewing the additional evidence, but argued the deeper inquiry was necessary and worth it to protect markets.
EEI and EPSA Largely Disagree with the Agencies
The Edison Electric Institute (“EEI”) and the Electric Power Supply Association (“EPSA”) also submitted voluminous comments. Each organization argued generally that the Commission’s current market power regime is working and should not be significantly altered. Each asserted that the additional screens and approaches contemplated in the NOI are unnecessary and would burden both market participants and the Commission.8 Industry likes predictability, and EEI emphasized throughout its filing the importance of maintaining the objectivity of the current analysis—a position significantly at odds with the recommendations of the DOJ and FTC. Seeking enhanced objectivity and streamlining, EEI and EPSA advocated for additional blanket authorizations and clearer black letter rules.9 EEI argued that it makes sense that FERC’s market power analysis would differ from the FTC’s and DOJ’s because each agency has a different statutory mission; to employ the same analysis would be unnecessarily duplicative. The Agencies did not directly address why their proposals would not render duplicative analyses amongst the agencies involved.
1 Modifications to Commission Requirements for Review of Transactions under Section 203 of the Federal Power Act and Market-Based Rate Applications under Section 205 of the Federal Power Act, 156 FERC ¶ 61,214 (2016) (“NOI”); Comment of the U.S. Department of Justice and the Federal Trade Commission, Docket No. RM16-21 (Nov. 28, 2016) (“DOJ/FTC Comments”). Section 203 of the FPA requires the Commission’s prior authorization of certain transactions involving public utilities, including mergers, acquisitions, dispositions, and changes of control involving jurisdictional facilities. 16 U.S.C. § 824b(a)(4). FPA section 205 requires just and reasonable rates and enables the Commission, through its regulations, to grant market-based rate authority (“MBR authority”) for wholesale sales of electric energy, capacity, and ancillary services if a seller demonstrates that it and its affiliates do not have, or have adequately mitigated, any horizontal and vertical market power. 16 U.S.C. § 824d(a). FERC utilizes, among other things, certain screens to assess market power under these sections of the FPA.
2 DOJ/FTC Comments at 2. Although the transactions subject to FPA section 203 review are broader than “mergers,” the Agencies’ comments focus largely on FERC’s analysis of market power in the context of mergers, specifically. The extent to which the Agencies intended for their recommendations to apply to non-merger FPA section 203 transactions is not clear.
3 The Agencies asserted that electricity markets are susceptible to market power because demand is inelastic; entry into the market is difficult; transmission constraints limit supply by making it difficult for outside generating facilities to sell within constrained areas; and operators must balance supply and demand continually for engineering areas. DOJ/FTC Comments at 6.
4 In the NOI, FERC described the supply curve analysis as one that “overlays a demand curve and a supply curve in order to assess whether a merged company has the ability and incentive to exercise market power by withholding output from marginal units (i.e., ability units) to raise prices in order to benefit its baseload units (i.e., incentive units) and increase its total profits.” NOI at P 20.
5 DOJ/FTC Comments at 14 (emphasis in original).
6 DOJ/FTC Comments at 20.
7 In conducting their merger reviews, the Agencies first receive information about mergers that are reportable under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”). This includes documents prepared by or for senior management to help assess markets, market shares, competition, and competitors relevant to the transaction. Next, based on HSR submissions and public information, the Agencies decide whether to start an investigation and request additional information. The Agencies then may seek information from third-party sources, such as customers, competitors, and others with information about the relevant market. During an investigation, the Agencies may issue subpoenas or civil investigative demands. See DOJ/FTC Comments at 18-20.
8 Comments of Electric Power Supply Association, Docket No. RM16-21 (Nov. 28, 2016) (“EPSA Comments”) at 2, 1; Comments of Edison Electric Institute, Docket No. RM16-21 (Nov. 28, 2016) (“EEI Comments”) at 6
9 EEI Comments at 36-41; EPSA Comments at 18-24.