FERC Lightens the Load in Merger Review Process
After months of delay, FERC last week finally issued a notice of proposed rulemaking in which it seeks to significantly ease the regulatory filing demands for applicants of both horizontal and vertical utility mergers.
The Commission hopes to accomplish this by stripping away the layers of out-dated filing requirements and by not requiring full market-power analyses for the so-called "easy mergers," ones that don't raise any major market-power concerns [RM98-4]. This would allow for more "timely processing" of utility merger applications, and would provide energy companies with "reasonable predictability" as to how FERC will act on their merger requests, said Commissioner William Massey, who was in charge of the task of reshaping the filing requirements.
The NOPR "represents a major advance in our effort to systematize merger review, and to prepare for new developments on merger and acquisition activity," said Chairman James Hoecker. "We need to maintain our ability to address mergers quickly, sensibly and effectively." Although "good policy is important," he noted "good policy without good implementation is ineffectual."
Will the streamlined filing rules and potentially faster FERC decisions encourage more utility mergers in the future, which some electric industry insiders think could pose a danger to a competitive market? "I think we will be seeing more merger applications over time just because market participants are trying to position themselves to thrive in this new environment," Massey noted. "I don't know that our NOPR is going to encourage more mergers. I don't think it will."
Although the effect of increased merger activity on electric competition is a "legitimate concern," he noted the Commission's proposed guidelines only would aggravate the situation in the event they were to provide for a "less fulsome evaluation of market-power issues," which FERC doesn't plan to do. "We [will] focus like a laser beam on that issue," Massey said.
"The real danger from mergers is an increase in market power. But if our analysis is appropriately focused on market-power issues, I think that we can reassure ourselves and the market that mergers won't increase market power, while at the same time moving the cases through the Commission in a timely way."
While Massey agrees that FERC should be "appropriately cautious now with respect to big mergers," he doesn't believe that a moratorium on such utility mergers at the Commission is warranted at this time - an action that has been advocated by the American Public Power Association and the National Rural Electric Cooperative Association.
Rules for Vertical Mergers
In the NOPR, the Commission for the first time formally proposes an analytical framework for assessing the competitive effects of vertical (electric-gas) mergers. Although FERC has acted on seven such combinations in the past two years, its 1996 policy statement on mergers barely addressed the issue of how to evaluate these types of mergers. As a result, it has been developing policy for vertical mergers on a case-by-case basis.
The NOPR proposes "certain abbreviated filing requirements and limitations on the scope of our review" of vertical mergers. "This should greatly reduce the number of applications that will require a complete analysis of the vertical aspects of a proposed merger involving a jurisdictional public utility," the proposed rulemaking said.
A candidate for an abbreviated screening analysis would be a proposed merger where one of the partners, such as a gas supplier, would sell either a small amount or no gas at all into the downstream generation market of its utility merger partner, according to the NOPR. Vertical mergers that can show they pose little competitive threat in the initial review won't have to endure a further, more detailed market analysis, resulting in an "expeditious processing" of such mergers. Those that fail, however, will be subjected to a more rigorous review and will be required to submit additional market data.
FERC proposes to adopt this strategy with all mergers, whether vertical or horizontal, where the threat to competition is minimal. It took this approach in the Duke-PanEnergy merger, concluding the combination would have a "negligible effect" on market concentration because of the distance between the companies' energy markets.
The fear with any merger, whether it be horizontal or vertical, is that it will disrupt competition through higher prices or reduced output, the NOPR noted. "Horizontal mergers can cause this by eliminating a competitor from the market and by the exercise of market power by the merged firm." Vertical mergers, on the other hand, have the opportunity to cause this by giving a competitive edge to their downstream electric affiliates via lower prices and/or greater supply.
In a companion order to the NOPR, the Commission seeks industry comments and has called for a public conference to be held to discuss the use of computer modeling in conducting merger analysis [PL98-6]. "It is not yet a panacea, but it certainly is an important first step in facilitating our market analysis and standardizing everyone's assumptions about how power markets work," Hoecker said.
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