On September 22, 2016, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) seeking comment on whether and, if so, how FERC might modify or enhance its methods for identifying and assessing market power in reviewing transactions under Section 203 of the Federal Power Act (FPA) and applications for market-based rate authority under Section 205 of the FPA. FERC also seeks comment on whether increased harmonization of its currently separate approaches to market power analysis under Sections 203 and 205 is warranted and feasible. Certain of the potential changes, if adopted, would significantly alter FERC’s Section 203 and 205 analyses and could result in new burdens and benefits for affected entities. Comments on the NOI will be due 60 days after publication of the NOI in the Federal Register. After evaluating the comments on the NOI, FERC may or may not issue a notice of proposed rulemaking proposing revisions to its regulations regarding Section 203 and 205 filings. We briefly address each of FERC’s requests for comment below.
Standardization of FERC’s “De Minimis” Effect Analysis Under Section 203
Section 203 applicants are not required to provide a full Competitive Analysis Screen if they can demonstrate that their proposed transaction will have only a de minimis effect on horizontal competition. However, FERC’s regulations do not currently define or provide a threshold for de minimis effect. FERC notes that it has received and accepted diverse representations of what de minimis effect means, and seeks comment on whether and, if so, how to more precisely define de minimis effect in Section 203 reviews, including (1) whether a specific threshold is appropriate, (2) what it would be and (3) how it would be calculated.
FERC also seeks comment on whether the so-called “2ab analysis” often used to demonstrate lack of impact on horizontal competition produces inaccurate results for certain transactions, such as partial acquisitions of competitors in the same market. Specifically, FERC seeks comment on (1) whether it should continue to permit use of the “2ab analysis;” (2) whether the “2ab analysis” remains useful for some transactions but not others; and (3) whether FERC should develop an alternative abbreviated test for the effect of a proposed transaction on market concentration.
Addressing Competition Concerns in Connection with “Serial Merger Theory”
FERC has expressed concern in several contexts over the potential for relatively small serial acquisitions to create horizontal market power concerns over time, even if individual transactions do not raise red flags. In the NOI, FERC requests comment on whether to consider incremental acquisitions in its competition analysis, including the de minimis effect analysis, as well as alternative methods for identifying competition concerns arising from incremental acquisitions.
Adding a Supply Curve Analysis to FERC’s Competitive Analysis Screen
FERC’s Competitive Analysis Screen—for Section 203 applications that require one—does not currently include a “supply curve analysis,” which involves overlaying a demand curve and a supply curve for the relevant market to assess whether a proposed transaction would give an entity the ability and incentive to exercise market power by withholding output from marginal generating units to raise prices to benefit baseload units and increase total profits. Such an analysis—which applicants can provide as “alternative evidence” in the event of a Competitive Analysis Screen failure—is more granular than FERC’s “delivered price test,” which examines aggregate capacity rather than capacity segments (i.e., baseload, intermediate, and peaking).
In the NOI, FERC seeks comment on (1) whether requiring a supply curve analysis as part of the Competitive Analysis Screen could strengthen FERC’s ability to identify situations that might not require increased scrutiny based on FERC’s current approach, but where parties could “still have the ability and incentive to raise prices above competitive levels,” and (2) if so, what information should be required and what metrics evaluated.
Pivotal Supplier Screen Effectiveness in Section 205 Analysis and Potential Addition to Section 203 Analysis
FERC currently uses a “pivotal supplier analysis” screen—which evaluates an entity’s ability to exercise market power based on its uncommitted generating capacity at the time of annual peak demand in the relevant market—only in evaluating applications for market-based rate authority under Section 205. In the NOI, FERC seeks comment on (1) the use, effectiveness, and areas for improvement or modification of the pivotal supplier screen in the market-based rate context, including whether to expand its scope from energy-only markets to capacity and ancillary services markets and whether modifications to the screen would create more burdens than benefits; and (2) whether adding a pivotal supplier screen would enhance FERC’s Section 203 analysis by enabling FERC to determine whether (i) a party is a pivotal supplier before a transaction, (ii) the transaction would render the party a pivotal supplier and (iii) the degree to which a party is a pivotal supplier would be affected by the transaction. FERC also seeks comment on how, if it were to add pivotal supplier analysis to its Section 203 analysis, it should interpret pivotal supplier screen results in the Section 203 context.
Adding a Market Share Screen to FERC’s Section 203 Analysis
FERC’s current Section 203 analysis focuses, in part, on prospective changes in market concentration that would result from a proposed transaction. Questioning whether it should adjust the Section 203 analysis to account for accumulation of market share over time through multiple transactions, or a combination of transactions and project development, FERC seeks comment on (1) potential benefits of a longitudinal examination of market share in its Section 203 analysis; (2) whether there is a specific market share above which market power concerns should arise in a Section 203 review; (3) what that threshold should be; (4) whether market share analyses in the Section 203 context, if added, should be applied to capacity and ancillary services markets in addition to energy markets; and (5) whether an alternative market share screen would better address whether an entity has accumulated a dominant market position through serial acquisitions.
Treatment of Capacity Associated with Long-Term Firm Power Purchase Agreements
FERC also seeks comment on whether it should alter the way it accounts for capacity associated with long-term firm power purchase agreements (PPAs) in its Section 203 analysis when the purchaser under such a PPA proposes to acquire the relevant generating facility. FERC’s current approach attributes such capacity to the prospective buyer’s pretransaction market share, meaning that such proposed acquisitions typically do not affect the prospective buyer’s market shares or horizontal competition. FERC notes, however, that its current approach may not adequately account for changes in market concentration related to such transactions, especially when they occur close to the expiration of such PPAs. Specifically, FERC seeks comment on whether and, if so, under what circumstances an alternative approach to evaluating capacity associated with long-term firm PPAs would increase the accuracy of FERC’s Section 203 analysis with respect to transactions involving such PPAs.
Requirement to Submit Certain Additional Transaction-Related Documentation
FERC also requests comment on whether, for transactions that require a full Competitive Analysis Screen, applicants should be required to submit additional documentation that could assist FERC’s review of the proposed transaction, including “consultant reports” or “other internal reports that assess the competitive effects” of a proposed transaction that are required by the Department of Justice or the Federal Trade Commission. FERC also requests comment on the potential costs and benefits and issues of commercial sensitivity or confidentiality that such a requirement might create.
Blanket Authorizations Under Section 203 of the FPA
Following the Energy Policy Act of 2005, which changed the scope of transactions subject to FERC review under Section 203, FERC adopted blanket authorizations for certain transactions subject to Section 203 but for which FERC would not require a case-by-case review. FERC notes that, since granting certain of these blanket authorizations, industry changes may have rendered some of them no longer appropriate, such as the blanket authorization under Section 203(a)(2) for a person that is a holding company solely with respect to one or more exempt wholesale generators (EWGs) to acquire the securities of additional EWGs, given that EWGs now comprise a significant portion of supply and that transactions involving EWGs could affect wholesale rates by affecting competition.
Accordingly, FERC seeks comment on (1) whether any of the existing blanket authorizations under Section 203 “may be overly broad or no longer appropriate;” (2) whether “classes of transactions” exist for which additional or different blanket authorizations or some other form of expedited review would be appropriate, including dispositions of securities with limited rights to governance of public utilities, such as passive investment transactions, or transfers of transmission facilities already consolidated into the existing transmission network of a public utility; and (3) whether reporting requirements would be appropriate, in lieu of or in addition to the requirement to file an application, in certain cases.
Transactions Subject to Only Section 203(a)(1)(B)
Unlike the other subsections of Section 203(a)(1), which include a $10 million transaction value applicability threshold, Section 203(a)(1)(B) requires public utilities to obtain FERC authorization to “merge or consolidate, directly or indirectly, [FERC-jurisdictional] facilities or any part thereof with those of any other person, by any means whatsoever,” with no minimum value threshold. FERC notes that this has resulted in many applications for authorization of “transfers of low-value equipment” that do not raise concerns under FERC’s public interest analysis under Section 203. Accordingly, FERC seeks comment on whether there are additional categories of transactions for which “abbreviated filing requirements” may be appropriate, including whether there are “categories of proposed transactions that are jurisdictional only under Section 203(a)(1)(B) that, by their nature, do not require the same level of scrutiny,” such as proposed transactions involving jurisdictional facilities below a minimum value threshold.
To the extent that such categories exist, FERC seeks comment “on ideas for facilitating expeditious processing of those transactions,” such as “abbreviated filing requirements,” possibly including requests for partial waiver of certain filing requirements; certifications that proposed transactions are consistent with the public interest (i.e., will not adversely affect competition, rate or regulation, and will not result in cross-subsidization); or alternative methods for expedited review.
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