[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