He was quite literally the toast of last year’s EEI Finance conference. Using his bank’s diverse resources (Rothschild vineyards in France), he arranged an unforgettable wine tasting that was a...
Hurdling Ever Higher: A New Obstacle Course for Mergers at the FERC?
a prominent component of the FERC's merger analysis poses significant problems for potential merger partners.
Once a merger is consummated, the merged firms are viewed as a single firm under antitrust law. That single firm is, of course, legally incapable of conspiring with itself. In the absence of a merger, however, companies that pursue efficiencies and coordinated cost reductions in the
ordinary course of business must bear the full brunt of scrutiny under section 1 of the Sherman Act, which prohibits anticompetitive joint action or collusion. If, as a condition to merger approval, the FERC requires companies to demonstrate that they tried to achieve efficiencies through creative new forms of joint action, it may blur the line between efficiency-enhancing joint action and impermissible collusion. Section 1 often chills the very exchange of competitively sensitive information that is necessary to identify and capture the efficiencies associated with joint action between competitors.
The dilemma facing utility executives is illustrated by a recent example from the defense industry. In 1992, the Federal Trade Commission (FTC) opposed Alliant Techsystems' proposed merger with its principal competitor in the ammunition supply market, at least in part because the FTC concluded that the merger efficiencies could largely be achieved through contractual arrangements in the competitive bidding context. In 1994, Alliant Techsystems was on the receiving end of a complaint filed by the government, alleging that Alliant had entered into an anticompetitive joint venture or teaming arrangement in response to a federal request for proposals in a particular market for cluster bombs. As part of a consent decree entered into in 1994, Alliant and its partners in the teaming arrangement each agreed to pay civil penalties exceeding 2 million dollars.15
In a variety of contexts, federal antitrust regulators have warned against possible collusion resulting from strategic alliances, joint ventures, joint contractual relationships, and other activities that the FERC might be tempted to explore as a precondition to merger approval.16
Apart from encouraging unprotected joint action between competitors, the approach of the Midwest Power Systems concurrence is unlikely to serve the end of distinguishing good mergers from bad ones. It is probably safe to say that utilities would not lightly pursue drastic restructuring in the form of a merger (particularly a merger of equals) if lawful, less drastic alternatives could achieve the same efficiencies. Moreover, the proposed comparative analysis of alternatives would likely necessitate an unwieldy, speculative, and difficult factual inquiry that would tax the capabilities of traditional antitrust enforcement authorities. Even if federal electricity regulators were equipped to perform such a complex analysis, the best that can be said is that such analysis flies in the face of allowing competition rather than regulation to drive the market's restructuring process.
MAKING THE RACE LONGER
The call for a new merger standard apparently assumes that harmful increased concentration in the generation sector will occur as a result of all utility mergers. The logical path to this conclusion is a curious one: "In other words, should the merged company be given credit for achieving the competitive benefits of open access if all public