DOJ-FERC Split on Full Display in the Duke-Progress Merger By Jonathan Noble Duke Energy Corporation (Duke) and Progress

Energy, Inc. (Progress) completed a $32 billion merger on July 3, 2012, creating the nations largest electric utility with 7.1 million customers in six states in the Southeast and Midwest.1 A large energy merger like this one depended on antitrust approvals by the U.S. Department of Justice (DOJ) and the Federal Energy Regulatory Commission (FERC). Although the DOJ completed its antitrust review in less than a month,2 the FERC held up the deal for over a year, rejecting the parties proposals twice before approving the deal on June 8, 2012.3 This article explains why the DOJ and the FERC, charged with essentially the same task, approached their jobs so differently. Specifically, the article describes the FERCs antitrust analysis, the DOJs antitrust analysis, and how the two differ. Finally, the article tentatively concludes that this two-tiered result should encourage the DOJ and the FERC to streamline their efforts to promote regulatory clarity. The FERCs authority Section 203. The FERC draws its authority to approve or deny mergers in energy markets from section 203 of the Federal Power Act. Section 203(a)(4) requires the FERC to approve a transaction if it determines that the transaction will be consistent with the public interest.4 The FERCs analysis of whether a merger will be consistent with the public interest generally involves consideration of several factors, including the mergers effect on competition.5 To determine a mergers effect on competition, the FERC reviews it for horizontal competitive concerns and vertical competitive concerns. Horizontal competitive concerns arise when two companies competing in the same market merge or join together. Vertical competitive concerns arise when a firm combines with a supplier or distributor, robbing business from its competitor. Because the Duke-Progress deal is a horizontal merger between two competitors, the FERC and the DOJ analyzed the deal according to their respective horizontal merger guidelines, described below. How the FERC concluded its review. The Duke-Progress merger raises serious horizontal competitive concerns in the Carolinas. The combined company will control the vast majority of North Carolinas electric grid. As a result, the FERC concluded in its September 2011 rejection that the merger would reduce competition for wholesale power in the utilities' home turf of the Carolinas. This large horizontal merger may discourage outside generators from selling energy in the North Carolina electricity market, the FERC asserted.6 The FERC finally approved the merger after Duke and Progress agreed to implement three key market power mitigation measures. First, the companies will spend about $110 million

on seven transmission projects intended to bring competitors power into the Carolinas, increasing market competition.7 Second, Duke and Progress promised to sign power purchase deals with three outside wholesale electricity marketing companies that would be in effect until the transmission projects are finished.8 Third, the utilities have agreed not to recover the money from North Carolina retail customers for at least five years.9 The FERCs horizontal merger guidelines: rigorous and predictable. How does the FERC decide which horizontal mergers produce enough anticompetitive market power that they do not serve the public interest (and thus violate section 203)? The FERC still uses the 1992 DOJ/FTC Horizontal Merger Guidelines as its basic framework for evaluating the competitive effects of proposed mergers (1992 Guidelines).10 The 1992 Guidelines published jointly by the DOJ and the Federal Trade Commission 11 set out a five-step framework that the agencies used to identify mergers that raise competitive concerns early in the process.12 The main advantages to FERCs Horizontal Merger Guidelines are rigor and predictability. The 1992 Guidelines, which the DOJ based on its 1982 Guidelines, are intentionally rigid and formulaic, precisely because they were designed to eliminate fuzziness and unpredictability in merger antitrust analysis. With the 1992 Guidelines, companies know what criteria the agency considers important and how important the agency weighs them. Under the 1992 Guidelines, horizontal merger analysis follows a strict, five-step sequence. Because the 1992 Guidelines promote rigor and predictability, the FERC continues to use them, even though the DOJ and the FTC themselves now use their new 2010 Guidelines.13 The FERC considered switching to the 2010 Guidelines last year by opening rulemaking proceedings. But it ultimately declined to update its antitrust policy and terminated the rulemaking proceeding on February 16, 2012.14 The DOJs approach: experience-based and flexible. Two developments encouraged the DOJ to abandon the 1992 Guidelines, at least in practice. First, the DOJ believed that the 1992 Guidelines were too inflexible in their approach and if strictly followed would allow some anticompetitive mergers to avoid challenge. Over time, the DOJ internally adopted new approaches to merger analysis to the point where many elements of the 1992 Merger Guidelines were largely irrelevant to prosecutorial decision-making. The 2010 Guidelines effectively brought those internal new approaches out in the open.15 Second, despite some initial reluctance, courts increasingly accepted the 1992 Guidelines approach, especially as to the first step market definition. They provided a clear, step-bystep formula that many judges preferred in technical cases such as antitrust suits. But some courts used the DOJs own guidelines against it. For example, the courts rejected agency challenges when they concluded that the DOJ departed from the Guidelines, either because

the DOJ failed to prove an element required by the Guidelines or because the court applied the Guidelines algorithms to the facts to reach different conclusions than the agencies.16 The revised 2010 Guidelines now stress that the DOJ does not have to apply a rigid fivestep test in its merger analysis. Rather, in addressing the central question of whether consumers will be harmed by the merger, the 2010 Guidelines consistent with current practice over the last several years hold that the DOJ may use whatever tools and approaches it thinks are appropriate. In other words, the DOJ may employ any reliable means of analyzing the competitive effect of a transaction on customers guided by their extensive experience.17 The main advantages to this approach are flexibility and the benefit of experience. As to flexibility, the DOJ is free to find antitrust violations even when the fact scenario would normally fail the five-step test. Instead of finding violations only where the rule allows, the DOJ can look past the rule to find violations where the effects of the companies actions result in excessive market power. As to experience, the 2010 Guidelines permit the DOJ to lean on its experience and knowledge in antitrust enforcement to decide what should constitute a violation. The upshot, though, is that the 2010 Guidelines are less useful in predicting agency enforcement behavior. The policies in practice. The FERC and the DOJ now have different approaches to reviewing horizontal mergers: The FERC uses a more rigid five-step test, and the DOJ uses a more flexible inquiry into market behavior. How do these approaches differ in what the agencies reject as antitrust violations? In practice, the 2010 Guidelines have probably not had much influence on the DOJs enforcement policy, though in the future they could.18 Perhaps this should not be surprising because, as mentioned earlier, the 2010 Guidelines merely reflect what has already been the DOJs internal policy for some time. But the 2010 Guidelines invite the possibility of an aggressive pro-enforcement policy in the future. By its very nature, the DOJ no longer needs to follow a measurable standard to find a violation it need only lean on its experience. It remains to be seen how the courts will treat the 2010 Guidelines.19 The FERC and the DOJ: the possibility of coordination. Although the FERC and the DOJ have in large part concurrent jurisdiction over electricity mergers, the two agencies today conduct their reviews very differently, as discussed above. This divergence in horizontal merger guidelines sometimes leads to a divergence in results, as was the case in the Duke-Progress merger. Would collaboration between the DOJ and the FERC promote consistency in their decisions? Donna K. Kooperstein, an energy attorney with King and Spalding LLP, argues that the prospects for greater DOJ-FERC collaboration appear to be low.20 The DOJ has coordinated well with agencies in past, particularly with the Federal Communications

Commission (FCC). For example, in the Comcast Corp./NBC Universal Inc. joint venture matter, the DOJ explained that its unprecedented coordination with the FCC allowed for more effective, efficient and consistent remedies enabling the DOJ to rely on the FCCs order to remedy certain issues.21 But the DOJ has not yet coordinated with an agency operating under a completely different horizontal merger analysis, as does the FERC. Notably, the DOJ and the European Union (EU) hit a fundamental impasse in the GE/Honeywell case. The DOJ saw a stronger, more competitive GE, while the EU saw a GE that would disadvantage competitors. As Assistant U.S. Attorney General Charles A. James stated at the time, the agencies appear to have reached different results from similar assessments of competitive conditions.22 But as Ms. Kooperstein notes, divergence may not be such a bad thing. If the DOJ and the FERC reached a coordination agreement, merging firms will avoid conflicting mandates but will also have less ability to leverage one agency against the other. Concerned competitors or customers will have one less forum in which to press their position. On the other hand, coordination would almost certainly benefit future actors by providing efficiency and consistency in governmental decision-making.23

See Matthew L. Wald, Duke and Progress Energy Become Largest U.S. Utility, N.Y. TIMES, (Jul. 3, 2012), http://www.nytimes.com/2012/07/04/business/energy-environment/duke-energy-merger-creates-largest-us-utility.html. 2 Duke Energy Corp., Annual Report (Form 10-K), at 36, http://www.duke-energy.com/pdfs/DukeEnergy_2011_AR10k.pdf. 3 Order Accepting Revised Compliance Filing, as Modified, and Power Sales Agreements, 139 FERC 61,194 (2012) (June Order). 4 16 U.S.C. 824b(a)(4) (2006). 5 See Merger Policy Statement, FERC Stats & Regs. 31,044 at 30,111. 6 Order on Disposition of Jurisdictional Facilities and Merger, 136 FERC 61,245 (2011). 7 June Order at P 25. 8 Id. at P 114. 9 See Duke, Progress File Updated Settlement Agreement in North Carolina, WASHINGTON ENERGY REPORT, http://www.troutmansandersenergyreport.com/2012/05/duke-progress-file-updated-settlement-agreement-in-north-carolina/. 10 Merger Policy Statement, FERC Stats. & Regs. 31,044 at 30,118, 30,130 (1992 Merger Policy Statement). 11 U.S. Dept. of Justice & Federal Trade Commission, Horizontal Merger Guidelines (1992), as revised (1997) (1992 Guidelines) http://www.justice.gov/atr/public/guidelines/hmg.htm. 12 1992 Merger Policy Statement at 30,119. The five steps are: (1) assess whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured; (2) assess whether the merger, in light of market concentration and other factors that characterize the market, raises concern about potential adverse competitive effects; (3) assess whether market entry would be timely, likely and sufficient either to deter or counteract the competitive effects of concern; (4) assess whether the merger would result in increases in efficiency that cannot reasonably be achieved through the parties by other means; and (5) assess whether either party to the merger would fail without the merger, causing its assets to exit the market. Id. at 30,111. 13 U.S. Dept of Justice & Fed. Trade Commission, Horizontal Merger Guidelines 1 (2010) (2010 Guidelines), available at http://www.ftc.gov/os/2010/08/100819hmg.pdf. 14 Order Reaffirming Commission Policy and Terminating Proceeding, 138 FERC 61,109 (2012). 15 See Kenneth S. Price, et al, The 2010 DOJ and FTC Horizontal Merger Guidelines: Increasing Realism While Reducing Predictability (August 31, 2010) http://www.shearman.com/files/Publication/ab9140f8-9e14-435a-81a2bc7aed4b5175/Presentation/PublicationAttachment/a5963ded-f8af-4a53-926d-33a515633bf6/AT-083010-The-2010-DOJand-FTC-Horizontal-Merger-Guidelines.pdf. 16 Id. 17 Id. 18 See Daniel A. Crane, Has the Obama Justice Department Reinvigorated Antitrust Enforcement?, 65 STAN. L. REV. ONLINE 13 (Jul. 18, 2012) http://www.stanfordlawreview.org/online/obama-antitrust-enforcement. I say probably because the DOJ does not publish opinions describing its reasoning. 19 See Leah Brannon and Kathleen Bradish, The Revised Horizontal Merger Guidelines: Can the Courts be Persuaded? (October 2010) http://www.cgsh.com/files/Publication/47e0571f-2ae8-4626-90ec04be6ab182f9/Presentation/PublicationAttachment/343a1b8b-a693-4717-a539-0c1f2d1a4d0e/Oct10-BrannonC.pdf. 20 Donna N. Kooperstein, Converging on Federal Reviews of Electricity Mergers (Jan. 17, 2012) http://www.kslaw.com/imageserver/KSPublic/library/publication/2012articles/1-12Law360Kooperstein.pdf. 21 Id. 22 Id. 23 Id.