By Rich Heidorn Jr.

WASHINGTON — FERC said last week it is considering changing how it evaluates market power in electric utility mergers and applications for market-based rate authority (MBRA).

Most of the changes the commission is considering in its Notice of Inquiry (RM16-21) would affect merger reviews.

The commission noted that its market power evaluation for mergers, which are regulated under Section 203 of the Federal Power Act, differs from that used in MBRA applications under Section 205.

“While some of those differences may be appropriate, others may not be,” the commission said, adding that it was seeking to “harmoniz[e]” the two.

The commission asked for comment on whether it should make the following changes in Section 203 reviews:

• Use a simplified analysis for transactions that typically don’t raise market power issues;
• Add supply curve and market share analyses;
• Modify how capacity under long-term power purchase agreements is attributed;
• Require submission of documents already required by other federal antitrust regulators; and
• Develop a more precise definition or test of de minimis in determining when a full competitive analysis screen is unnecessary in merger reviews.

The commission also is considering improving its single pivotal supplier analysis in MBRA applications and adding one to Section 203 evaluations.

Chairman Norman Bay said the proposed changes were not the result of concerns over a specific merger.

“There certainly have been a number of mergers over the last few years in the electric industry, but I don’t think there was any one specific act that led us to review the screens that we use in conducting our reviews under Section 203 of the FPA,” he said in a press conference after Thursday’s commission meeting. “I think more it’s a matter of continually striving for improvement as an organization or as an agency. And in order to do that, from time to time, you have to take a step back and examine what you’ve been doing and … ways to improve what you’re doing.”

Comments will be due 60 days after the notice’s publication in the Federal Register.

Adding Pivotal Supplier Screen

The commission said it is looking for new tools to ensure the effectiveness of its market power reviews, including the use of wholesale market share and pivotal supplier screens currently used in Section 205 MBRA reviews.

Merger applicants are currently required to perform a competitive analysis screen unless they can show that the acquisition does not increase their generation capacity in the relevant geographic markets or that the increase is de minimis.

The screen includes a delivered price test, which has been essentially unchanged since its introduction in 1996 and generally focuses on the short-term energy market “with far less detail and attention given to the other relevant products,” FERC said.

In contrast, the pivotal supplier screen measures a seller’s ability to exercise market power based on its uncommitted capacity at the time of annual peak demand in the relevant market. A seller passes the screen if wholesale load can be served without any of the seller’s capacity participating.

Although pivotal supplier tests are usually applied to energy-only markets, the commission said they could be applied to capacity and ancillary service markets under both sections 203 and 205. “Adding a pivotal supplier test to the commission’s review of a Section 203 application could make the commission’s analysis more effective because it would take into account the ability to meet demand, in addition to supply conditions, in screening for potential market power,” FERC said.

But the commission said it also seeks to improve the test because MBRA applicants “rarely fail” it.

“In many cases, the results of the pivotal supplier analysis indicate that the study area’s wholesale load can be met solely by remote suppliers, a result that is unlikely in practice,” FERC said. “The commission intended that the indicative screens would serve as a conservative threshold. However, with experience, this does not seem to be the case.”

As a result, the commission said it is considering whether to replace the current wholesale load proxy, defined as the average of the daily peak native load during the month in which the annual peak load day occurs.

FERC is considering replacing that input with the study area’s annual peak load — peak load not reduced by the proxy for native load obligation.

Market Share Analyses

The commission said its current merger analysis is a forward-looking review focused on how a transaction changes market concentration “and not an examination of market share changes or accumulation of market share over time.”

Thus, the commission said it is considering adding a market share analysis measuring the size of the applicant relative to other suppliers, allowing it to “determine if a seller has obtained a significant share in a specific market either through a series of transactions or a combination of transactions and construction, allowing for the accumulation of market power without one particular transaction triggering concerns.”

The MBRA wholesale market share screen determines whether a seller has a dominant market position by analyzing the number of megawatts of uncommitted capacity it controls relative to the uncommitted capacity of the entire market. Sellers with less than a 20% market share during all seasons pass the test.

Supply Curve Analysis

The commission said it also is weighing whether to incorporate into its merger review a supply curve analysis to determine whether the acquisition would give the purchasing company the ability and incentive to exercise market power by withholding output from some generators to benefit other units and increase its overall profits.

The analysis would be more granular than the delivered price test, which measures aggregate capacity but not the breakdown by baseload, intermediate and peaking units.

“A supply curve analysis would enable the commission to identify situations that typical [Herfindahl-Hirschman Index] analyses do not capture, including situations where mergers that result in changes in market concentration below the thresholds that merit further scrutiny from an HHI perspective may still have the ability and incentive to raise prices above competitive levels,” the commission said.

Capacity Associated with Power Purchase Agreements

FERC also sees a need to change how it accounts for capacity subject to long-term firm power purchase agreements.

If a utility signs a long-term firm PPA for the output of a generating facility before filing an application to purchase that generator, the commission has usually attributed the generator’s capacity to the purchasing utility. That means the company’s acquisition of the plant would not be seen as increasing its market share.

“While the current approach of attributing the capacity of the facility to the purchaser is appropriate in the context of the market-based rate market power analysis, in the Section 203 context the change in market concentration may extend beyond the terms of the PPA,” FERC said. “For example, if a transaction conveys ownership over a generation facility where a PPA is expiring in two years, the transaction may prevent competitive supply from re-entering the market.”

Applicant Merger-Related Documents

FERC noted that merger applicants are required to submit to the Department of Justice and Federal Trade Commission both internal reports and those of consultants that concern the competitive effects of an acquisition.

“We believe these merger-related documents could be useful in the commission’s understanding of an applicant’s competitive analysis screen by providing additional information regarding, for example, the relevant geographic market definition or anticipated unit retirements,” it said.

Blanket Authorizations

FERC also is taking another look at its use of blanket authorizations — waivers of commission review for certain Section 203 transactions. The commission said it is considering canceling blanket authorizations for some types of deals and extending them to others.

“Since these blanket authorizations were granted, industry has undergone substantial change, including continued market development and expansion of RTOs/ISOs [and] consolidation among utilities, such that the conditions that gave rise to the blanket authorizations currently in effect may no longer be appropriate,” FERC said. “For example, it may no longer be appropriate to grant blanket authorizations to holding companies that only hold exempt wholesale generators, as is granted in 18 CFR 33.1(c)(8), as exempt wholesale generators now make up a significant portion of supply and any transaction involving these generators could affect wholesale rates by impacting competition.”

Exempt wholesale generators, a category created under the Energy Policy Act of 1992, are independent units that sell exclusively to wholesale customers and were exempt from some requirements of the Public Utility Holding Company Act of 1935. PUCHA was repealed in 2005.

– Michael Brooks contributed to this report.