[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Notices]
[Pages 16394-16398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6738]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. RM11-14-000]
Analysis of Horizontal Market Power Under the Federal Power Act
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Notice of inquiry.
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SUMMARY: In this Notice of Inquiry, the Federal Energy Regulatory
Commission seeks comment on whether, and if so, how, the Commission
should revise its approach for examining horizontal
[[Page 16395]]
market power concerns in transactions under Sec. 203 of the Federal
Power Act to reflect the Horizontal Merger Guidelines issued by the
Department of Justice and Federal Trade Commission on August 19, 2010
(2010 Guidelines), and 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.
DATES: Comments are due May 23, 2011.
ADDRESSES: You may submit comments, identified by docket number by any
of the following methods:
Agency Web site: http://ferc.gov. Documents created
electronically using word processing software should be filed in native
applications or print-to-PDF format and not in a scanned format.
Mail/Hand Delivery: Commenters unable to file comments
electronically must mail or hand deliver an original copy of their
comments to: Federal Energy Regulatory Commission, Secretary of the
Commission, 888 First Street, NE., Washington, DC 20426.
FOR FURTHER INFORMATION CONTACT:
Stephen J. Hug (Legal Information), Office of General Counsel--Energy
Markets, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426. (202) 502-8009.
Eugene Lee (Technical Information), Office of Energy Market Regulation,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426. (202) 502-6195.
SUPPLEMENTARY INFORMATION:
Notice of Inquiry
March 17, 2011
1. In this Notice of Inquiry, the Federal Energy Regulatory
Commission (Commission) seeks comment on whether, and if so, how, the
Commission should revise its approach for examining horizontal market
power concerns in transactions under Sec. 203 of the Federal Power Act
(FPA) \1\ to reflect the Horizontal Merger Guidelines issued by the
Department of Justice (DOJ) and Federal Trade Commission (FTC)
(together, the Antitrust Agencies) on August 19, 2010 (2010
Guidelines), and 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 under Sec. 205 of the FPA.\2\
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\1\ 16 U.S.C. 824b.
\2\ 16 U.S.C. 824d.
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I. Background
A. Section 203
2. Section 203(a)(4) of the FPA requires the Commission to approve
a proposed disposition, consolidation, acquisition, or change in
control if it finds that the proposed transaction will be consistent
with the public interest. In the 1996 Merger Policy Statement, the
Commission set out the three factors it generally considers when
analyzing whether a proposed Sec. 203 transaction is consistent with
the public interest: effect on competition, effect on rates, and effect
on regulation.\3\ In analyzing whether a proposed transaction will have
an adverse effect on competition, the Merger Policy Statement adopted
the Antitrust Agencies' 1992 Horizontal Merger Guidelines (1992
Guidelines) \4\ and its five-step framework,\5\ as well as the Appendix
A analytic screen, based on the 1992 Guidelines, to identify
transactions that would not harm competition. The components to a
screen analysis are as follows: (1) Identify the relevant products; (2)
for the purpose of determining the size of the geographic market,
identify customers who may be affected by the merger; (3) for the
purpose of determining the size of the geographic market, identify
potential suppliers to each identified customer (includes a delivered
price test (DPT) analysis, consideration of transmission capability,
and a check against actual trade data); and (4) analyze market
concentration using the Herfindahl-Hirschman Index (HHI) \6\ thresholds
from the 1992 Guidelines.\7\
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\3\ Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act: Policy Statement, Order No. 592, FERC Stats. &
Regs. ] 31,044, at 30,111 (1996), reconsideration denied, Order No.
592-A, 79 FERC ] 61,321 (1997) (Merger Policy Statement). The Energy
Policy Act of 2005 added the requirement that the Commission find
that the transaction will not result in inappropriate cross-
subsidization, unless the Commission determines that such cross-
subsidization will be consistent with the public interest. Energy
Policy Act of 2005, Public Law 109-58, 1289, 119 Stat. 594, 982-83
(2005), codified, 16 U.S.C. 824b(a)(4).
\4\ U.S. Dept. of Justice & Federal Trade Commission,
``Horizontal Merger Guidelines'' (1992), as revised (1997) (1992
Guidelines).
\5\ Merger Policy Statement, FERC Stats. & Regs. at 30,118. The
five steps are: (1) Defining the markets; (2) evaluating whether the
extent of concentration of the market raise concerns about potential
adverse competitive effects; (3) assessing whether entry could
counteract such concerns; (4) assessing any efficiency gains that
cannot otherwise be gauged; and (5) assessing whether either party
to the merger would fail without the merger, causing its assets to
exit the market.
\6\ The HHI is a widely accepted measure of market
concentration, calculated by squaring the market share of each firm
competing in the market and summing the results. The HHI increases
both as the number of firms in the market decreases and as the
disparity in size between those firms increases. Both the Antitrust
Agencies and the Commission use HHI to assess market concentration.
See infra P 10, 12.
\7\ Merger Policy Statement, FERC Stats. & Regs. at 30,119-20,
30,128-37.
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3. The Commission adopted the HHI thresholds set forth in the 1992
Guidelines to classify a market as unconcentrated, moderately
concentrated, and highly concentrated, and to assess the competitive
significance of the change in HHI resulting from a proposed
transaction. The Commission, based on the 1992 Guidelines, classifies a
market as unconcentrated if the post-merger HHI in the market is below
1,000 points and considers mergers that result in an unconcentrated
market as unlikely to have adverse competitive effects, regardless of
the change in HHI resulting from the merger.
4. The Commission classifies a market as moderately concentrated if
the post-merger HHI ranges from 1,000 to 1,800. Under the Commission's
standards, a merger in a moderately concentrated market that involves
an increase in HHI of more than 100 points is considered to potentially
raise significant competitive concerns. The Commission currently
classifies a market as highly concentrated if the post-merger market's
HHI exceeds 1,800 and considers mergers that result in a change in HHI
that is greater than 50 points as potentially raising significant
competitive concerns. If the change in HHI exceeds 100 points, the
merger is presumed to create or enhance market power.
5. The Commission revised its regulations to reflect the adoption
of the 1992 Guidelines in the analysis of horizontal market power in
Sec. 203 transactions. Section 2.26 of the Commission's regulations
states:
(a) The Commission has adopted a Policy Statement on its
policies for reviewing transactions subject to section 203. That
Policy Statement can be found at 77 FERC 61,263 (1996). The Policy
Statement is a complete description of the relevant guidelines.
Paragraphs (b)-(e) of this section are only a brief summary of the
Policy Statement.
* * * * *
(c) Effect on competition. Applicants should provide data
adequate to allow analysis under the Department of Justice/Federal
Trade Commission Merger Guidelines, as described in the Policy
[[Page 16396]]
Statement and Appendix A to the Policy Statement.\8\
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\8\ 18 CFR 2.26.
6. The Commission described the 1992 Guidelines as a well-accepted
standard approach for evaluating the competitive effects of mergers but
noted that the 1992 Guidelines ``are just that--guidelines. They
provide analytical guidance but do not provide a specific recipe to
follow.'' \9\ In addition, the Commission noted analytic challenges in
applying the 1992 Guidelines to the electric power industry, ``because
the industry is evolving very rapidly and because the industry has some
unique features.'' The Commission explained that an analysis that
follows the 1992 Guidelines still requires many assumptions and
judgments to fit specific fact situations.\10\ In the Supplemental
Policy Statement, the Commission noted that the Antitrust Agencies use
``informal and non-public processes for reviewing transactions,'' in
contrast to the public process used by the Commission.\11\ The courts
have also acknowledged that the Commission's standard of review is
whether a transaction is ``consistent with the public interest,'' and
that the Commission was not intended to enforce antitrust policy in
conjunction with the Antitrust Agencies.\12\
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\9\ Merger Policy Statement, FERC Stats. & Regs. at 30,118.
\10\ Id.
\11\ FPA Section 203 Supplemental Policy Statement, FERC Stats.
& Regs. ] 31,253, at P 69-70 (2007), order on clarification, 122
FERC ] 61,157, at P 15 (2008).
\12\ Northeast Utilities Service Co., 993 F.2d 937, 947 (1st
Cir. 1993).
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7. The Commission subsequently issued Order No. 642, which stated
that, consistent with the 1992 Guidelines, applicants that failed the
competitive screen could submit evidence to assist the Commission in
evaluating the following factors to show that the proposed transaction
would not have an adverse effect on competition: (1) The potential
adverse competitive effects of the merger; (2) whether entry by
competitors can deter anticompetitive behavior or counteract adverse
competitive effects; (3) the effects of efficiencies that could not be
realized absent the merger; and (4) whether one or both of the merging
firms is failing and, absent the merger, the failing firm's assets
would exit the market.\13\
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\13\ Revised Filing Requirements Under Part 33 of the
Commission's Regulations, Order No. 642, FERC Stats. & Regs. ]
31,111, at 31,898 (2000) (1992 Guidelines sec. 0.2 Overview). These
factors are codified at 18 CFR 33.3(f). The 2010 Guidelines retain
these steps, but place less emphasis on them.
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B. Market-Based Rates
8. With respect to the Commission's analysis of horizontal market
power in its market-based rate program, the Commission employs two
preliminary screens--the wholesale market share indicative screen and
the pivotal supplier indicative screen--and failure of either screen
results in a rebuttable presumption of horizontal market power. The
intent of the indicative screens is to identify those sellers that
raise no horizontal market power concerns and can otherwise be
considered for market-based rate authority.\14\
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\14\ Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities, Order No. 697,
FERC Stats. & Regs. ] 31,252, at P 62, clarified, 121 FERC ] 61,260
(2007), order on reh'g, Order No. 697-A, FERC Stats. & Regs. ]
31,268, clarified, 124 FERC ] 61,055, order on reh'g, Order No. 697-
B, FERC Stats. & Regs. ] 31,285 (2008), order on reh'g, Order No.
697-C, FERC Stats. & Regs. ] 31,291 (2009), order on reh'g, Order
No. 697-D, FERC Stats. & Regs. ] 31,305 (2010).
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9. The Commission has traditionally employed a 20 percent threshold
for the wholesale market share screen (a seller with a market share of
less than 20 percent passes the screen).\15\ The Commission stated that
the use of such conservative thresholds at the indicative screen stage
of a proceeding is warranted because the indicative screens are meant
to identify those sellers that raise no horizontal market power
concerns, as well as those that require further examination.\16\ The
Commission reasoned that a 20 percent threshold for the wholesale
market share screen struck the proper balance between identifying
sellers that may present market power concerns, while avoiding the risk
of ``false negatives'' and imposing undue regulatory burdens on
sellers. Several protesters argued that the 20 percent threshold was
too low in light of the 1992 Guidelines' statement that firms with 35
percent or more market share have market power. The Commission rejected
these arguments, stating that a market with five equal-sized firms with
20 percent market shares will have an HHI of 2,000, which is above the
HHI threshold used in the 1992 Guidelines for a highly-concentrated
market,\17\ and that market power is more likely to be present at lower
market shares in markets for commodities with low demand price-
responsiveness, like electricity, than in markets with high demand
elasticity.\18\
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\15\ AEP Power Marketing, Inc., 97 FERC ] 61,219, at 61,969
(2001); AEP Power Marketing, Inc., 107 FERC ] 61,018, at P 8, 102
(April 14 Order), order on reh'g, 108 FERC ] 61,026 (2004).
\16\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 62.
\17\ As explained further below, the Antitrust Agencies use HHI
as a method of classifying a market based on its level of
concentration. See infra P 12. Under the 1992 Guidelines, a market
with an HHI above 1,800 is considered to be highly concentrated.
1992 Guidelines sec. 1.5.
\18\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 80, 89-93.
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10. Sellers that fail either indicative screen may rebut the
presumption of market power in one of several ways, including by
submitting a DPT analysis. The DPT defines the relevant market by
identifying potential suppliers based on market prices, input costs,
and transmission availability, and calculates each supplier's economic
capacity and available economic capacity for each season and load
condition. The results of the DPT can be used for pivotal supplier,
market share, and market concentration analyses. In analyzing market
concentration in this context, the Commission uses an HHI threshold of
2,500.\19\ In rejecting arguments that it should, consistent with the
1992 Guidelines, adopt an HHI threshold of 1,800, the Commission noted
that the Department of Justice had previously advocated an HHI
threshold of 2,500 for analyzing whether to grant market-based pricing
for oil pipelines and that the Department of Justice had further stated
that the Commission could reasonably conclude that an entity
participating in a market with an HHI threshold of less than 2,500 had
a rebuttable presumption that it did not have market power.\20\
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\19\ Id. P 110-111; April 14 Order, 107 FERC ] 61,018 at P 110-
11.
\20\ Order No. 697, FERC Stats. & Regs. ] 31,252 at P 110
(citing Comments of the U.S. Department of Justice in response to
Notice of Inquiry Regarding Market-Based Ratemaking for Oil
Pipelines, Docket No. RM94-1-000 (Jan. 18 1994)).
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II. The 2010 Guidelines
11. The 2010 Guidelines set forth how the Antitrust Agencies will
evaluate the competitive impact of mergers, focusing on whether a
merger results in anticompetitive effects such as ``encouraging one or
more firms to raise price, reduce output, diminish innovation, or
otherwise harm customers as a result of diminished competitive
constraints or incentives.'' \21\ The 2010 Guidelines replace the 1992
Guidelines and explain several changes to the analysis set forth in the
1992 Guidelines.
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\21\ 2010 Guidelines sec. 1.
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12. Specifically, the 2010 Guidelines raise the HHI thresholds used
by the Antitrust Agencies to classify a market as unconcentrated,
moderately concentrated, or highly concentrated. The 2010 Guidelines
modify the thresholds adopted in the 1992 Guidelines for the purpose of
classifying a particular market and assessing the
[[Page 16397]]
significance of a post-merger change in HHI, as summarized in the table
below.
HHI (Market Concentration) Thresholds
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Market 1992 Guidelines 2010 Guidelines
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Unconcentrated.................... <1000 <1500
Moderately Concentrated........... 1000-1800 1500-2500
Highly Concentrated............... >1800 >2500
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HHI Changes Potentially Raising Significant Competitive Concerns
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Moderately Concentrated Markets... >100 >100
Concentrated Markets.............. >50 >100, <200
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HHI Changes Presumed Likely to Enhance Market Power
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Concentrated Markets.............. >100 >200
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13. In addition, 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. Instead, the 2010
Guidelines state that the Antitrust Agencies will engage in 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.\22\ Section 6.3 of the 2010
Guidelines provides additional guidance as to how the methods in the
2010 Guidelines can be tailored to analyze markets involving relatively
undifferentiated products. In particular, Sec. 6.3 of the 2010
Guidelines identifies factors that may indicate that a merged firm may
find it profitable to unilaterally suppress output in a market
involving relatively undifferentiated products.\23\
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\22\ Id.
\23\ Id. sec. 6.3.
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14. The 2010 Guidelines also address the potential competitive
effects arising from partial acquisitions and minority ownership.\24\
The proposed analysis of a partial acquisition focuses on three
principal effects: (1) Whether the acquiring company will be able to
influence the competitive conduct of the target firm; \25\ (2) whether
the partial acquisition will reduce the financial incentive to compete
because losses from one owned firm are offset by gains at the other;
\26\ and (3) whether the partial acquisition enables companies to
access non-public competitive information that can lead to coordinated
activity by the firms.\27\
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\24\ Id. sec. 13.
\25\ The 2010 Guidelines state that a voting interest in the
target firm or specific governance rights, such as the right to
appoint members to the board of directors, can permit such
influence. Id.
\26\ The 2010 Guidelines state that acquiring a minority
position in a rival might significantly blunt the incentive of the
acquiring firm to compete aggressively because it shares in the
losses inflicted on the rival. Id.
\27\ Issues relating to partial acquisitions are among the
issues before the Commission in Docket No. RM09-16-000. Control and
Affiliation for Purposes of Market-Based Rate Requirements under
Section 205 of the Federal Power Act and the Requirements of Section
203 of the Federal Power Act, Notice of Proposed Rulemaking, FERC
Stats. & Regs. ] 32,650 (2010).
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III. Request for Comments
15. The Commission seeks comment on whether, and if so, how, the
Commission should revise its approach for examining horizontal market
power concerns in transactions under Sec. 203 of the FPA to reflect
the 2010 Guidelines. As discussed above, 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. Should
the Commission adopt this approach? If so, what elements of this
approach should the Commission adopt? And how should the Commission
incorporate these elements into its analysis? The 2010 Guidelines'
reduced emphasis on market definition and prescribed formulas aside,
should the Commission adopt the revised HHI levels in the 2010
Guidelines in its analysis of whether a proposed transaction will
adversely affect competition under Sec. 203 of the FPA?
16. For example, the 2010 Guidelines raise the HHI threshold for an
unconcentrated market and classify a market where the post-merger HHI
is below 1,500 as unconcentrated. Should the Commission adopt the 2010
Guidelines' classification? Or should the Commission continue to
classify a market as unconcentrated if the post-merger HHI in the
market is below 1,000 points?
17. While the 2010 Guidelines continue to retain a threshold of 100
points for the purpose of assessing the significance of a post-merger
change in HHI in a moderately concentrated market, the 2010 Guidelines
classify a market with a post-merger HHI of between 1,500 and 2,500 as
moderately concentrated. Should the Commission adopt the 2010
Guidelines' classification of a moderately concentrated market, or
should the Commission continue to classify a market as moderately
concentrated if the post-merger HHI ranges from 1,000 to 1,800?
18. Under the 2010 Guidelines, a market is classified as highly
concentrated if the post-merger HHI exceeds 2,500, and mergers that
involve an increase in HHI of between 100 and 200 points are considered
to potentially raise significant competitive concerns, with mergers
resulting in a change of greater than 200 points presumed to be likely
to enhance market power. Should the Commission adopt the 2010
Guidelines' thresholds for the purpose of identifying a market as
highly concentrated and assessing the competitive significance of a
change in HHI resulting from a merger? Or should the Commission
continue to classify a market as highly concentrated if the post-merger
market's HHI exceeds 1,800? Also, should the Commission continue to
consider mergers that result in a change in HHI that is greater than 50
points as potentially raising significant competitive concerns, and
that mergers resulting in a change in HHI exceeding 100 points are
presumed to create or enhance market power?
19. Should the Commission adopt any of the other aspects of the
2010 Guidelines? If so, which ones, and how would the Commission
incorporate these aspects into its market power analysis?
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20. In this regard, we note that there are fundamental differences
between the Commission's process and that of the Antitrust Agencies.
The Commission's review process is public and parties can intervene and
submit comments, while the review process at the Antitrust Agencies is
nonpublic and closed. The Commission's merger decision is based on a
factual record shaped not only by the applicant, but by intervenors and
subject to analysis by Commission staff. The merger decisions by the
Antitrust Agencies are based on information submitted by the applicant,
non-public information gathered by the agency staff, as well as the
economic analysis performed by agency staff. The Commission seeks
comment on whether the differences between the Commission's process for
considering applications under Sec. Sec. 203 and 205 of the FPA and
the process used by the Antitrust Agencies for considering mergers
affect the extent to which the Commission should adopt the 2010
Guidelines.
21. Finally, the Commission also 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.
IV. Comment Procedures
22. The Commission invites interested persons to submit comments,
and other information on the matters and issues identified in this
notice. Comments are due May 23, 2011. Comments must refer to Docket
No. RM11-14-000, and must include the commenter's name, the
organization they represent, if applicable, and their address in their
comments.
23. The Commission encourages comments to be filed electronically
via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing
formats. Documents created electronically using word processing
software should be filed in native applications or print-to-PDF format
and not in a scanned format. Commenters filing electronically do not
need to make a paper filing.
24. Commenters that are not able to file comments electronically
must send an original copy of their comments to: Federal Energy
Regulatory Commission, Secretary of the Commission, 888 First Street,
NE., Washington, DC 20426.
25. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commenters on this proposal are
not required to serve copies of their comments on other commenters.
V. Document Availability
26. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m.
Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426.
27. From FERC's Home Page on the Internet, this information is
available on eLibrary. The full text of this document is available on
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or
downloading. To access this document in eLibrary, type the docket
number excluding the last three digits of this document in the docket
number field.
28. User assistance is available for eLibrary and the FERC's Web
site during normal business hours from FERC Online Support at (202)
502-6652 (toll free at 1-866-208-3676) or e-mail at
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. E-mail the Public Reference Room at
[email protected].
By direction of the Commission.
Kimberly D. Bose,
Secretary.
[FR Doc. 2011-6738 Filed 3-22-11; 8:45 am]
BILLING CODE 6717-01-P