On 16 February 2012, the Federal Energy Regulatory Commission (FERC) took a decidedly different approach to its regulatory approval for mergers and acquisitions of electric utilities by declining to adopt the Department of Justice’s (DOJ) and the Federal Trade Commission’s (FTC) (collectively “Antitrust Agencies”) 2010 Horizontal Merger Guidelines that raise the thresholds that trigger market-power concerns. In so doing, FERC reaffirmed its approach to analyzing horizontal market power concerns for proposed mergers under section 203 of the Federal Power Act using the 1992 Horizontal Merger Guidelines’ basic five-step framework, with the addition of the Competitive Analysis Screen FERC developed to aid the first step of the analysis. In declining to adopt the 2010 Guidance, FERC pointed to the unique characteristics of electricity markets that made them more susceptible to the exercise of market power than the other markets regulated by the Antitrust Agencies, and, as a result, made application of the higher market-power thresholds from the 2010 Guidelines inappropriate. FERC also declined to modify its standards for granting marketbased rate applications to reflect the 2010 Guidelines.
In 1996, FERC adopted the five-step framework from the Antitrust Agencies’ 1992 Horizontal Merger Guidelines as its basic framework for evaluating the competitive effects of proposed mergers in its Merger Policy Statement. In supplementing this framework, FERC adopted a Competitive Analysis Screen, which as part of the first step, evaluates whether the proposed merger would significantly increase concentration in relevant markets. The components of the Competitive Screen Analysis include:
- Identifying the relevant products;
- Identifying customers who may be affected by the merger;
- Identifying potential suppliers of each identified customer (including a delivered price test analysis, consideration of transmission capability, and a check against actual trade data); and
- Analyzing market concentration using the Herfindahl- Hirschman Index (HHI) thresholds from the 1992 Guidelines.
According to FERC, this analysis is intended to identify mergers that clearly do not raise competitive concerns early in the process.
In 2011, FERC issued a Notice of Inquiry (NOI) regarding whether to revise its approach to examining horizontal market power to reflect the 2010 Guidelines. The NOI highlighted that the 2010 Guidelines: (1) raised the HHI thresholds for market concentrations, and (2) deemphasized market definition as a starting point for the Antitrust Agencies’ analysis, instead opting for a fact-specific inquiry using a variety of analytical tools. The NOI also addressed how the Antitrust Agencies analyzed partial acquisitions and minority ownership.
After considering the comments submitted in response to the NOI, FERC declined to adopt the 2010 Guidelines for the purpose of evaluating proposed mergers. FERC agreed with certain commenters that the more relaxed HHI thresholds in the 2010 Guidelines are inappropriate for electricity markets because electricity markets are more susceptible to market power due to the large capital investments necessary for entry, lack of substitutable products, lack of storage, and relative inelasticity of demand. Accordingly, FERC elected to retain its five-step framework with the Competitive Analysis Screen for evaluating whether a merger will have an adverse impact on competition.
FERC found that the Competitive Analysis Screen continues to be an important tool for analyzing proposed mergers because it provides a standard, conservative check while providing procedural and analytic certainty to the industry. Despite the concerns that FERC is overly rigid in its application of the Competitive Analysis Screen, FERC maintained that its approach is flexible enough to incorporate aspects of the 2010 Guidelines, while retaining the certainty that the current approach provides. FERC reiterated that its Merger Policy Statement allows intervenors and FERC Staff to raise issues regarding whether the screen accurately captured market power concerns. FERC also maintained that applicants that fail the market screen could address market conditions beyond the change in HHI, such as demand and supply elasticity, ease of entry and market rules, as well as technical conditions, such as the types of generation involved.
As a practical matter, FERC’s decision may subject utility mergers to multiple competitive reviews under different standards. The action, therefore, may make it more difficult for FERC and either the FTC or DOJ to coordinate competitive reviews on transactions in which both agencies may have jurisdiction. Similarly, the action may impose upon the merging parties an obligation to tailor their arguments in support of the transaction to different competitive analyses while maintaining a consistent position about its market effects.
FERC also declined to modify its approach to market power analysis for market-based rate applications to incorporate the 2010 Guidelines. In this regard, FERC noted that its current market-based rate analysis is not explicitly tied to the Antitrust Agencies’ guidelines and its 2,500 HHI threshold is already consistent with the 2010 Guidelines. FERC elected to retain its current 20 percent threshold for indicative screens because it found this threshold strikes the appropriate balance between having a realistic screen and imposing undue regulatory burden.