United States: DOJ And FTC Advocate Broader Approach To FERC's Market Power Evaluation Under Sections 203 And 205 Of The Federal Power Act

Last Updated: December 15 2016
Article by George D. Billinson, Mark R. Haskell, Thomas Reid Millar, Paul J. Pantano, Jr. and Lamiya Rahman

Most Read Contributor in United States, August 2018

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.

Footnotes

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.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions