Economic Analysis

In the dynamic arena for energy market share, market concentration and perceived market power can be the critical factors in regulatory approval for applications ranging from fairly routine market-based rate filings all the way to mergers and acquisitions. While the basic concepts surrounding fair markets and monopoly power are well known, there remains continuing uncertainty about the precise definitions of market power. The Supreme Court has defined market power as the ability to raise prices above the levels that would be charged in a competitive market. The question quickly expands to encompass the number of participants in the market, the geographic limits that define the market and alternative goods or services that can limit price manipulation. Brown Williams’ economists and analysts can provide complete competitive analysis and evaluation of natural gas, electric transmission, crude oil or refined oil products markets on behalf of its clients.

Competition Analysis

The high cost of entry into infrastructure heavy industries like pipeline and power generation make it all the more imperative that a thorough competition analysis precede a major business move. Evaluating the strengths and weaknesses of competitors – existing and potential – can help fashion a strategy that incorporates obstacles and opportunities. Economic and regulatory barriers should be examined to understand how they can help or hinder a strategic plan. Knowing the key assets, abilities, and locations can define the strength of the competition and reveal opportunities to establish new business ventures. Brown Williams offers clients a team of experts that can identify not just who the competition is, but why they are competitors.

Market Concentration Studies

Market concentration is an indicator that some market participants may have the ability to engage in anticompetitive practices to the detriment of the consumers. The standard measure of concentration is the Herfindahl-Hirschman Index ("HHI"), which gives greater weight to the market shares of larger firms. In the gas and oil industries, the HHI is given great weight in evaluating market power and approving market based rates. In the electric industry, HHI can be misleading when a single pivotal supplier can withhold participation and endanger a whole market. Brown Williams helps clients assess the situation with tools such as the Pivotal Supplier Screen, Market Share Screen, and Delivered Price Test analyses. Brown Williams’ experts can guide a client through a market share analysis or review another party’s application to ensure its client’s interests are well represented

Market Power Assessments

The classic definition of market power is the ability to maintain high prices over an extended period without losing customers. Why a firm has that power may be dependent on several factors such as technological superiority, customer goodwill, financial depth to weather pricing wars, regulatory barriers, branding and promotion, or simply a lack of competitors. Market share is one indicator of possible market power, but the ability to engage in predatory pricing, product or service tying, and creation of overcapacity or other barriers to entry is a good sign that the markets are less than optimal. Brown Williams’ team of experts will evaluate the relevant markets to assist its clients in understanding the business environment they have on hand and help fashion a strategy to avoid, incorporate, or overcome market power problems.

Market Power Mitigation

A finding of market power by a regulatory agency will stop a proposed new service if the proposal does not include mitigation measures that counter the market power participant’s ability to exercise that power. Mitigation measures are intended to minimize interference with open and competitive markets, and thus to permit price levels to be determined by competitive forces under the prevailing market conditions. To that end, the mitigation measures authorize the mitigation only of specific conduct that exceeds well-defined thresholds. Brown Williams can help clients find ways to amend proposed service filings to answer regulators’ and interveners’ concerns and allow a project to move forward.

Market-Based Rates

Market-based rate applicants must demonstrate that they cannot withhold or restrict services and increase price above the competitive level for a significant period of time and that they cannot discriminate unduly in terms of price or conditions. To gain FERC approval to charge market-based rates, the applicant must file a detailed market power study demonstrating that it lacks market power and that its customers have sufficient “good alternatives” or that it can mitigate its market power. Brown Williams has been at the forefront of market-based rate design and participated in litigated FERC proceedings involving market-based rate applications for both pipelines and storage facilities. Brown Williams can provide an initial market power study to help the client determine whether it is likely that market-based rates can be justified, and follow through with the documentation and persuasive reports to support its client’s needs. Alternatively, Brown Williams can review other participant’s market-based rates studies to ensure or determine accuracy and sufficient back-up support.

Expertise

Competition Analysis

Market Concentration Studies

Market Power Assessments

Market Power Mitigation

Market-Based Rates