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Comments Solicited on Fundamental Changes to FERC's Market-Based Rate and Merger Review Process Tests

March 22, 2011

The Federal Energy Regulatory Commission ("Commission"), on March 17, 2011, issued a Notice of Inquiry ("NOI"), seeking comment on whether the Commission should change its horizontal market power analyses to incorporate the August 2010 Horizontal Merger Guidelines issued by the Department of Justice and Federal Trade Commission (collectively, the "Antitrust Agencies") in the conduct of Federal Power Act Section 203 (merger) and Section 205 (market-based rate) review. The 2010 Guidelines replace the Antitrust Agencies' 1992 Horizontal Merger Guidelines ("1992 Guidelines"), which are incorporated to some extent in FERC's approach to examining horizontal market power concerns.

The Commission states in the NOI that the 2010 Guidelines "place less emphasis on market definition and the use of a prescribed formula for considering the effects of a merger than the 1992 Guidelines," and, instead, endorse a "fact-specific inquiry using a variety of analytical tools, including direct evidence of competition between the parties and economic models that are designed to quantify the extent to which the merged firm can raise prices as a result of the merger." The Commission states in the NOI that it long has emphasized that the Antitrust Agencies' guidelines are not binding on it, but that even under the 1992 Guidelines it applied "many assumptions and judgments to fit specific fact situations." The Commission has found that its approach to a particular situation may differ from the Antitrust Agencies' approach because of the uniqueness of the electric power industry, the public nature of the Commission's review of a transaction, and the Commission's standard of review, which is whether the proposed transaction is consistent with the public interest. The Commission now seeks public comment as to the extent to which it should adopt the 2010 Guidelines, in light of the differences between its process for considering Section 203 and 205 applications and the Antitrust Agencies' process for evaluating mergers.

The Commission also seeks comment on whether to revise an important component of the horizontal market power analysis it uses in evaluating FPA Section 203 transactions. The Commission currently uses the 1992 Guidelines and an analytic screen based on the 1992 Guidelines in determining the effect on competition of a proposed disposition, consolidation, acquisition or change in control. The Commission's analytic screen measures market concentration by using the Herfindahl-Hirschman Index ("HHI") thresholds set forth in the 1992 Guidelines. The 2010 Guidelines raise each of the 1992 Guidelines' HHI thresholds for assessing market concentration used by the Commission currently to determine if a market is unconcentrated, moderately concentrated or highly concentrated. The NOI seeks comment on whether it should adopt the new thresholds for use in analyzing Section 203 transactions. 

The 2010 Guidelines introduce an analysis for evaluating whether partial acquisitions and minority ownership present horizontal market power concerns. As the NOI explains, the 2010 Guidelines propose a partial acquisition inquiry that focuses on "whether the acquiring company will be able to influence the competitive conduct of the target firm[,] whether the partial acquisition will reduce the financial incentive to compete because losses from one owned firm are offset by gains at the other[,] and . . . whether the partial acquisition enables companies to access non-public competitive information that can lead to coordinated activity by the firms." The NOI seeks comment on whether to adopt this aspect or any other particular aspect of the 2010 Guidelines.

Finally, the NOI seeks comment on "what impact the 2010 Guidelines should have, if any, on the Commission's analysis of horizontal market power in its electric market-based rate program." The Commission's analysis of horizontal market power in its electric market-based rate program does not follow the 1992 Guidelines. The market-based rate program analysis involves the use of two preliminary screens to identify sellers who may present horizontal market power concerns: the wholesale market share indicative screen and the pivotal supplier indicative screen. A rebuttable presumption of horizontal market power arises if a seller fails either the wholesale market share indicative screen or the pivotal supplier indicative screen. A seller passes the wholesale market share screen if it has a market share of less than 20 percent. This 20 percent threshold differs from the 1992 Guidelines, which found that a 35 percent or greater post-merger market share raised a rebuttable presumption of market power. The Commission has defended its 20 percent threshold, reasoning that a market with five equal-sized firms with 20 percent market shares will have an HHI that exceeds the 1992 Guidelines' threshold for a highly-concentrated market, and that a lower threshold is warranted in commodity markets that involve low demand price-responsiveness. 

The Commission's market-based rate program also incorporates a distinct HHI threshold in evaluating the market concentration of a seller who has failed one of the preliminary screens.  One type of evidence a seller may use to rebut the presumption of market power is a Delivered Price Test ("DPT") analysis, which identifies potential suppliers, each supplier's economic capacity and each supplier's available economic capacity. The results of a DPT analysis may be used in calculating market concentration and, if used for that purpose, a seller must calculate market concentration using the HHI based on market shares. The Commission then applies an HHI threshold of 2,500 to the market concentration analysis, which supports a rebuttable presumption that an entity participating in a market of less than 2,500 does not present market power concerns. Although higher than the 1992 Guidelines' recommended threshold, the 2,500 threshold comports with the 2010 Guidelines' revised HHI threshold for a highly concentrated market. As aforementioned, the Commission seeks comment on the extent to which the 2010 Guidelines should affect the electric market-based rate program.

Comments in response to the NOI are due 60 days after publication in the Federal Register.