Revised Department of Justice / Federal Trade Commission Guidelines -- 16 Months Later
Donna N. Kooperstein
A little over 16 months ago, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued revised Horizontal Merger Guidelines (http://www.justice.gov/atr/public/guidelines/hmg-2010.html) -- the first major revision in 18 years -- outlining how the federal antitrust agencies evaluate the likely competitive effects of a merger and determine whether to challenge it. The stated goal of the revisions was to reflect better the agencies’ actual approach to mergers, which had changed over the years in response to economic and other developments. Some of the revisions were controversial and their impact on merger enforcement hotly debated and uncertain: Would the antitrust agencies be more likely to challenge a transaction? Would they rely on novel and untested theories? Would they depart from traditional merger analysis? Would there be less predictability?
The concern emanated in large part from several key differences:
- More emphasis on examining competitive effects, particularly with economic models, and less emphasis on the significance of market definition and market share;
- More developed discussion of price discrimination markets (i.e., markets defined around particular customers);
- More flexible analysis of the likelihood of coordination; and
- Expanded discussion of unilateral effects, including effects on innovation, and elimination of a “safe harbor” provision that found unilateral effects unlikely where market share is below 35 percent.
But the agencies’ actions under the 2010 Guidelines suggests evolution, not revolution in antitrust enforcement overall (see Speech, Sharis A. Pozen, Acting Assistant Attorney General, available at http://www.justice.gov/atr/public/speeches/277488.pdf) and in the energy area in particular.
The energy cases filed thus far bear remarkable similarity to prior enforcement actions. In regard to gasoline-related services, the FTC, in May 2011, challenged Irving Oil’s proposed acquisition of terminals and pipeline assets in Maine, alleging in part that it would reduce the number of competitors from four to three for gasoline terminating in a local market in Maine and that it would enhance the ability and incentive of the remaining competitors to coordinate (http://www.ftc.gov/os/caselist/1010021/index.shtm). Six years ago, the FTC filed a complaint in Valero/Kaleb evincing similar concerns -- alleging reduced numbers of competitors for terminaling services in local markets in Northern California, Pennsylvania, and Colorado would lead to more effective coordination (http://www.ftc.gov/os/caselist/0510022/0510022.shtm). In its August, 2011 General Electric/Converteam case, DOJ claimed that reducing the number of competitors from three to two in low-speed synchronous electric motors used in oil and gas refineries would give GE the unilateral incentive and ability to raise its bid prices (http://www.justice.gov/atr/cases/geconvert.html). Ten years earlier, DOJ voiced similar competitive concerns in its challenge to the Ingersoll-Dresser Pump/Flowserve acquisition involving among other things specialized pumps used in oil refining (http://www.justice.gov/atr/cases/indx252.htm).
Similarly, for electric generators, the DOJ’s analysis in its recently filed Exelon/Constellation case (http://www.justice.gov/atr/cases/exelonceg.html) parallels its analysis in the ultimately abandoned Exelon/PSEG merger (http://www.justice.gov/atr/cases/exelon.htm). In both cases, the DOJ defined relevant geographic markets based on transmission constraints, examined the increases in concentration in the relevant electric wholesale markets, and presented a detailed analysis of unilateral harm based on the combined firm’s incentive and ability to withhold output from high cost plants and drive-up the market-clearing price.
Nonetheless, the revisions to the Guidelines mattered in the Exelon/Constellation case. The 2010 Guidelines offer DOJ more support for its unilateral analysis of electricity mergers than the 1992 Guidelines. In its Competitive Impact Statement (CIS), the DOJ specifically noted that the competitive effects described in the complaint were “closely analogous to the competitive effects described” in the 2010 Guidelines § 6.3, Example 2 -- indeed they virtually mirror each other. In addition, as the combined share of the generators was only 23 percent in one market and 28 percent in the other, the 2010 Guidelines’ elimination of the 35 percent “safe harbor” provision (which the agencies had tried to limit in their 2006 Commentary on the Horizontal Merger Guidelines, available at http://www.justice.gov/atr/public/guidelines/215247.htm), bolstered the complaint. Finally, the 2010 Guidelines’ emphasis on differentiated products invites the DOJ to find competitive harm at even lower concentration levels in the context of electricity mergers by determining that the merging parties’ generating plants are particularly close substitutes for each other. As DOJ observed in a footnote “teaser” about things to come, “mergers may be more problematic where the shift factors of the parties’ generation [i.e., relative effectiveness at relieving a constraint] indicate that one party’s generation is a meaningful substitute for the other party’s generation with respect to a given major constraint.”
The take-away? For now, the agencies’ past practices remain a good predictor of future action. But merging firms should not take comfort from relatively low market shares in cases where their capacity in terms of market share and cost may affect their incentive and ability to suppress output, where their products/services are close substitutes for each other, or where the market’s structure and operation otherwise supports a unilateral effects scenario.