United States: FERC Looks To Align Market Power Analysis For MBR Authority, FPA 203 Transactions

Last Updated: September 29 2016
Article by Russell Kooistra and Christopher Zentz

On September 22, 2016, FERC issued a Notice of Inquiry ("NOI") to examine whether to revise its market power analysis for transactions under section 203 of the Federal Power Act ("FPA") and market-based rate ("MBR") applications under section 205 of the FPA to provide greater alignment between the two. Specifically, in the NOI, FERC requests comment on whether it should: (1) simplify its analysis for certain FPA section 203 transactions that are unlikely to raise market power issues because they are likely to have a de minimis effect on competition; (2) add a supply curve analysis to its FPA section 203 analysis; (3) retain its current pivotal supplier analysis in the MBR context and also add this test to its FPA section 203 analysis; (4) expand its FPA section 203 analysis to require the filing of a market share analysis; (5) revise how it accounts for capacity associated with long-term firm power purchase agreements ("PPAs") in its FPA section 203 review; and (6) require the submission of additional merger-related documents for FPA section 203 transactions that require a full Competitive Analysis Screen. FERC also requests comments on its scope of review, including blanket authorizations under FPA section 203.

Under FPA section 203, FERC determines whether a proposed disposition, consolidation, acquisition, or change in control is consistent with the public interest by analyzing the transaction's effect on competition, effect on rates, and effect on regulation, in addition to whether the transaction results in cross-subsidization of a non-utility associate company. Pursuant to FPA section 205, FERC allows sales of energy, capacity, and ancillary services at market-based rates if the applicant and its affiliates can show they do not have horizontal and vertical market power, which applicants may demonstrate via FERC's wholesale market share screen and pivotal supplier screen.

In the NOI, FERC expressed interest in receiving comments on harmonizing its analysis of transactions under FPA section 203 and its MBR analysis under FPA section 205, streamlining the process for certain FPA section 203 applicants, and obtaining additional information that may better inform FERC's analyses. FERC explained that it was reviewing its market power analyses in the context of both its review of transactions under FPA section 203 and applications under FPA section 205 for MBR authority and whether its analyses in both contexts could be improved.

In particular, FERC seeks comment on whether:

  • To more precisely define the de minimis threshold in FERC's effect on competition analysis under section 203 of the FPA;
  • To incorporate consideration of incremental acquisitions into its FPA section 203 competition and de minimis analyses;
  • To add a supply curve analysis to its FPA section 203 horizontal market power analysis to determine whether a merged company may raise prices by withholding output from marginal units for the benefit of its baseload units;
  • To retain, or otherwise improve, the current pivotal supplier analysis in MBR cases, including by changing the wholesale load proxy metric, and to add an "appropriately constructed" pivotal supplier analysis to its FPA section 203 analysis;
  • To expand its FPA section 203 analysis to include a market share test, which FERC suggests will improve its analysis of an applicant's overall presence in the market;
  • To modify the treatment of long-term firm PPAs by including in its FPA section 203 analysis a form of market analysis following expiration of a long-term PPA; and
  • To require FPA section 203 applicants for transactions that require a full Competitive Analysis Screen to submit the consultant reports and internal reports that are required to be submitted to the U.S. Department of Justice and Federal Trade Commission as part of their merger reviews.

Finally, FERC requests comments on whether blanket authorizations for various FPA section 203 transactions are still appropriate in light of the changes to the electric industry since the blanket authorizations were established. Of note, FERC stated that it may no longer be appropriate to retain the blanket authorization for holding companies that only hold exempt wholesale generators ("EWGs"). FERC noted that EWGs are now a significant portion of supply and, thus, these generators may impact wholesale rates through effects on competition. In addition, FERC seeks comments on whether there are classes of transactions for which future blanket authorizations are appropriate and whether reporting requirements would also be appropriate. For example, FERC noted that one such type of transaction possibly warranting a blanket authorization is for those failing to exceed some minimum dollar threshold, which FERC noted comprised nearly twenty percent of the FPA section 203 transactions it reviewed in Fiscal Year 2015.

Comments on the NOI are due 60 days after publication in the Federal Register. A copy of the NOI is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Russell Kooistra
Christopher Zentz
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