The Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry on September 22, 2016, requesting comments on how FERC should revise its approach to identifying and assessing market power when it reviews applications seeking authorization to engage in merger transactions and to sell electric energy at market-based rates.1 The most important issue that FERC considers in deciding whether to authorize mergers and other transfers of public utility assets and whether to authorize public utilities to sell wholesale electric energy at market-based rates (instead of at rates based on the public utilities’ costs) is whether the authorization would reduce competition in electric markets. In particular, FERC evaluates whether public utilities engaging in such transactions or making such sales will have an ability to exercise market power.2
The Notice of Inquiry provides an opportunity for public utilities and entities investing in public utilities to suggest that FERC expand its blanket authorizations that allow certain transactions that do not raise market power issues to proceed without the need for specific FERC approval. It also could lead to more clarity about how applicants can demonstrate that a transaction will not raise any significant market power issues. However, the Notice of Inquiry also raises the possibility that FERC may require additional competition analyses to be performed and may require filing of additional information as part of merger applications.
Potential changes to blanket authorizations for merger transactions
FERC has granted in its regulations a number of blanket authorizations for transactions that are subject to prior approval by FERC under section 203 of the Federal Power Act (FPA).3 Parties to transactions falling within the parameters of those blanket authorizations may proceed without filing an application with FERC and waiting for FERC to issue an order specifically authorizing the transactions. In the Notice of Inquiry, FERC suggests that additional blanket authorizations may be appropriate, including in the following circumstances:
- dispositions of equity interests in public utilities where the securities provide their holders with limited governance rights. FERC has not provided clear guidance on whether FPA section 203 authorization is required for transfers of passive, non-controlling equity interests in public utilities. Consequently, FERC receives many applications that arguably are not required, particularly in connection with “tax equity” investments in renewable energy projects. These transaction rarely, if ever, raise competitive concerns.
- transfers of relatively small electric transmission assets, such as substations, to a public utility. FERC has determined that, under the “merger” provision of section 203 of the FPA, the statutory exemption for transactions with a value of less than $10 million does not apply to such transfers of electric transmission assets to a public utility and, as a result, FERC receives many applications for such transfers that raise no competitive concerns.
However, the Notice of Inquiry also suggests that certain blanket authorizations currently provided in FERC’s regulations may no longer be appropriate. For example, FERC seeks comment on whether to continue the current blanket authorization for acquisitions by holding companies whose only interests in relevant utility companies are in exempt wholesale generators (EWGs) (i.e., companies that are exclusively in the business of owning or operating, or both, facilities used for generation of electric energy for sale at wholesale and making such sales) of interests in additional EWGs. It is not clear why this blanket authorization would not be appropriate, given that the EWGs themselves are required to obtain authorization for changes in their upstream ownership, so that FERC already has the ability to review any effects such transactions may have on competition.
Potential changes to competition analyses and contents of applications raising market power issues
FERC is also requesting comments on certain elements of its competition analyses and on the evidence that applicants are required to provide to FERC in support of merger applications and applications for market-based rates, including as follows:
- FERC seeks comments on whether its analysis of market-power issues in merger applications under section 203 of the FPA should be harmonized with its analysis of similar issues in applications for market-based rates under section 205 of the FPA. This suggestion seems to have merit, since FERC’s interest in protecting consumers from the exercise of market power is similar in both types of applications. Moreover, in the case of transactions involving transfers of electric generating facilities used for sales at market‑based rates (or equity interests in such facilities), the owners of such facilities generally have to file with FERC a market-power analysis under section 205 of the FPA after consummation of the transaction, even though they have already filed an application with—and received authorization from—FERC under section 203 of the FPA for the transaction. It is not clear why two different analyses are required to assess the effects on competition of the same transaction.
- FERC often approves transactions under section 203 of the FPA based on a showing that the transaction will have a de minimis effect on competition (in lieu of requiring a more comprehensive competition analysis), but FERC has not clearly defined what constitutes a de minimis effect. FERC seeks comment on whether and how to define this more precisely. While it may not be possible to anticipate all possible situations that would constitute a de minimis effect on competition, some clarification of the standard may be useful.
- FERC seeks comment on whether to require merger applications filed under section 203 of the FPA to include a supply and demand curve analysis to assess whether and to what extent a transaction may increase the merged entity’s ability and incentive to withhold electric generation output to affect market prices. It is not clear whether FERC is considering this as an enhancement to or a replacement of the delivered price test that FERC currently requires in applications requiring competition analyses. This question will require input from economists who prepare competition analyses as well as from public utilities that file merger and market-based rate applications and from consumers. Relevant issues may include the availability of data and the cost and time required to prepare supply and demand curve analyses, as well as any advantages or disadvantages that supply and demand curve analyses, compared to the delivered price test, may have for purposes of determining whether proposed transactions will adversely affect competition.
- FERC seeks comments on whether the pivotal supplier screening analyses that it currently requires for applications for market-based rates under section 205 of the FPA should also be required in merger applications under section 203 of the FPA (and whether this test should be modified). In particular, FERC notes that the pivotal supplier test is intended to be a conservative screen for purposes of determining whether market-based rate applications require a more detailed competition analysis but that, in fact, applicants rarely fail this screen.
- Similarly, FERC seeks comments on whether a market-share screening analysis, as is required for section 205 market-based rate applications, should be required in merger applications under section 203 of the FPA and whether any changes should be made to this analysis (such as changing the current threshold of 20 percent or applying the analysis to markets other than energy, including capacity and ancillary services markets). This approach may help to establish a middle road for applications that do not meet the de minimis test discussed above but that also do not raise issues requiring a more detailed competition analysis (including a delivered price test analysis and an evaluation of market concentration using the Herfindahl-Hirschman Index (HHI) thresholds from the Department of Justice (DOJ) and Federal Trade Commission (FTC) ’s 1992 Horizontal Merger Guidelines).4
- FERC asks whether merger applications filed under section 203 of the FPA that require competitive screening analyses should include copies of consultant reports and internal documents that are submitted to the DOJ and FTC in forms filed with those agencies seeking clearance of mergers. This may raise issues about whether requiring filing of these reports might delay filing of FERC applications and whether these reports can be filed confidentially.
Comments in response to Notice of Inquiry
The Notice of Inquiry provides an opportunity for public utilities and equity investors in public utilities to suggest improvements to FERC’s process for considering applications that require consideration of effects on competition as well as to resist any proposed changes to the process that might increase costs or delays associated with transaction approval without providing a corresponding benefit to FERC’s protection of the public interest. Comments are due 60 days after publication of the Notice of Inquiry in the Federal Register. Based on the comments received, FERC may proceed to issue a notice of proposed rulemaking, which would initiate a further comment period and issue a notice of final rulemaking. This process could take several years, and there is no guarantee that that it will be completed; in 2010 FERC initiated a process to change its regulations addressing control over public utilities and affiliation among public utilities, which would have addressed some of the issues raised in the Notice of Inquiry, but this effort was never completed.5