December 01, 2016

Brattle Economists Submit Comments in Response to FERC Notice of Inquiry on Utility Merger Reviews and Market-Based Rate Applications

Brattle Principals Romkaew Broehm and James Reitzes, and Senior Associate Jeremy Verlinda have recently submitted comments to the Federal Energy Regulatory Commission (FERC) in response to the Commission’s Notice of Inquiry (NOI) on Analysis of Modifications to Commission Requirements for Review of Transaction Under Section 203 of the Federal Power Act and Market-Based Rate Applications under Section 205 of the Federal Power Act.

The NOI aims to determine whether the FERC should modify its horizontal market power review standards for M&A and market-based rate (MBR) approvals, and seeks comments on whether the FERC should improve and harmonize the competitive screen analyses it uses for M&A and MBR approvals.

In comments filed on November 28, 2016, Drs. Broehm, Verlinda, and Reitzes offer commentary on the following changes proposed by the FERC: (1) measuring de minimis effects; (2) prescribing a supply curve analysis for its Section 203 approval screen; (3) improving Section 205’s pivotal supplier screen and incorporating it into Section 203 review; and (4) setting a market share threshold for Section 203 review. With regard to these four issues:

  1. Drs. Broehm, Verlinda, and Reitzes explain that the change in the HHI mathematical expression, if applied correctly, will allow the Commission to screen for de minimis effects without having to depart from the Commission’s current safe harbor threshold.
  2. Drs. Broehm, Verlinda, and Reitzes do not comment as to whether the Commission should require all M&A applicants to submit a supply curve analysis. Instead, they submit a hypothetical supply curve analysis for the purpose of providing a common framework for discussion of the underlying mechanism for determining offers and market-clearing prices. In their discussion they emphasize the concepts of ability and incentive and formalize mathematically their role in offer determination. They describe that this could help both to identify problematic mergers and how specifically to mitigate, if possible, any expected harm from the merger. In addition, the authors present a detailed discussion of the real-world issues that the Commission must consider if it is to require M&A applicants to submit a supply curve analysis as part of their Section 203 review.
  3. Regarding the Commission’s concern on the current pivotal supplier screen, Drs. Broehm, Verlinda, and Reitzes recommend that the FERC explore alternative explanations for any perceived lack of screen failures in the current pivotal supplier test, including in particular the calculation of import capacity. They explain that the following information should be explored when determining the amount of import capacity available: historical data, such as pricing information from quarterly reports; transmission availability and usage; transmission rights of third parties with load in the examined market; and the number of transmission refusals.
  4. For a series of successive M&A transactions, Drs. Broehm, Verlinda, and Reitzes argue that a flexible set of tools, including the delivered price test, pivotal supplier analysis, and supply curve analysis, is likely sufficient for identifying potentially problematic transactions. They explain that therefore there is no need for a market share screen threshold for a Section 203 review.
The comments of Drs. Broehm, Verlinda, and Reitzes can be downloaded using the link below.