On September 22, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Inquiry (“NOI”) seeking comment on whether it should revise its approach to assess market power for transactions under section 203 of the Federal Power Act (“FPA”) and applications for market-based rate authority under section 205. The NOI also sought comment regarding the scope of FERC’s review of transactions under section 203. Last week, interested parties, including energy industry trade groups, corporations, and government agencies, including the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”), filed comments in response to the NOI. The comments reflect starkly different views on the appropriate scope of FERC’s review of market power issues.
COMMENTS EVIDENCE DIVISIONS AMONG INDUSTRY STAKEHOLDERS
Industry groups representing publicly held utilities and energy suppliers generally support FERC’s existing market power review process. The Edison Electric Institute (“EEI”), the Electric Power Supply Association (“EPSA”), and the Independent Power Representatives (“Independents,” a group of entities owning or controlling entities authorized to make FERC-jurisdictional wholesale sales) all question the value of, and do not support, additional screening or review mechanisms. As EEI notes, FERC already “applies a market power test to mergers that is significantly more conservative than the [Herfindahl-Hirschman] standard currently employed by DOJ.” The three commenters further support the creation of a clear and consistent standard exempting de minimis transactions from further review, and support continuation of FERC’s existing blanket approvals of certain transactions as well as development of additional blanket approvals—all questions raised in the NOI.
In contrast, a number of commenting parties representing not-for-profit rural, state, municipal, or locally-owned utilities, as well as those representing end-users of electricity, argued in support of a more comprehensive FERC review process. For example, the American Public Power Association, the Transmission Access Policy Study Group (commenting together as “APPA-TAPS”), the National Rural Electric Cooperative Association (“NRECA”) and the Electric Consumers Resource Council (“ELCON”) advocate for the addition of both supply curve and pivotal supplier analyses to the section 203 review process. NRECA and ELCON also recommend that FERC employ a market share analysis and support removal of the current blanket approval of certain transactions involving exempt wholesale generators.
With regard to a potential requirement that applicants provide FERC with the merger-related documents and other internal reports that are submitted to DOJ and FTC, APPA-TAPS, ELCON, and NRECA support such an obligation. Conversely, EEI, EPSA, and the Independents strongly oppose this proposal. As EPSA argues, the value of such documents is questionable, and any effective confidentiality protections equivalent to those provided by FTC and DOJ would be “fundamentally at odds with the notice-and-comment process.”
FTC AND DOJ URGE MORE AGGRESSIVE REVIEWS
The Antitrust Division of the DOJ and the FTC, the two federal agencies with primary responsibility for enforcing the antitrust laws, filed joint comments. These agencies recommend that FERC follow an analytical approach to assessing market power that more closely mirrors the competitive analysis applied in DOJ and FTC merger investigations. In particular, the DOJ and FTC urge FERC to consider evidence beyond structural indicators of market power, such as market share or market concentration. Contending that firms operating in electricity markets may be able to exercise market power even with relatively small market shares, the DOJ and FTC recommend that structural indicators should serve primarily as screens to identify applications that may require more in-depth investigation.
Specifically, the DOJ and FTC recommend that FERC:
- Add a supply curve analysis to its examination of mergers under section 203, to identify situations where a merger may facilitate the exercise of market power even where the increase in market concentration is relatively small.
- Refine its approach to defining geographic markets, applying a case-by-case analysis with particular emphasis on how transmission constraints may limit the scope of the relevant geographic market.
- Avoid reliance on market concentration statistics, such as the “2ab” statistic, as conclusive evidence that a proposed merger is likely to have de minimis impact.
- Revise how it analyzes power purchase agreements, gathering additional information on specific provisions in these agreements.
- Collect a larger range of documents and information, similar to the materials submitted to the DOJ and FTC during antitrust merger investigations.
If adopted, these recommendations would shift FERC toward an expanded, more fact-intensive review process that would more closely align with the approach followed by the federal antitrust agencies. As other commenters note, however, there may be sound reasons for FERC’s process to diverge from the DOJ and FTC. For example, comments submitted by industry experts frequently involved in section 203 applications contend that FERC’s current market power screens accurately identify the transactions requiring further analysis while also providing predictability and transparency to the industry.
FERC currently has three Commissioners, all Democrats. As a result of the election, the makeup of the Commission will change dramatically with President-elect Trump likely to appoint three Republicans and designate a new Chairman relatively early in his term. Consequently, there is a great deal of uncertainty regarding whether FERC will take any action to revise or modify its current process for identifying and assessing market power issues. Nevertheless, the potential for change exists and the implications could be significant if additional regulatory burdens are imposed on transactions in the electricity sector. Baker Botts will provide additional updates as warranted and the Antitrust and Energy Regulatory Practices can provide more information upon request.
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