When a solid waste collection company enters into a contract to transfer ownership of assets, a petition for approval must be submitted the New Jersey Department of Environmental Protection. Assets may not be transferred until this approval is obtained. One area which the NJDEP evaluates prior to issuing such an approval is the impact of the transfer upon effective competition. This is a very detailed analysis which can be time consuming.
The solid waste industry serves a dynamic market and the NJDEP must continually evaluate the market to ensure that there are multiple companies serving the customers in each market. The controlling case law is found in United States v. Philadephia Nation Bank, 374 U.S. 321 (1963), in which the United States Supreme Court held that any sale which results in one company controlling thirty percent or more of the market and results in a significant increase in the concentration of companies in that market creates a lessening of effective competition. When that is found it creates a presumption which is rebutted if it is shown that the sale is not likely to have such anti-competitive effects.
When the NJDEP performs an analysis of effective competition, it will only prohibit asset transfers if the transfer increases the company’s level of concentration in the market to an extent that could facilitate collusion among a small number of remaining competitors. The NJDEP considers the following factors to determine effective competition: 1) the size of the company compared to the other companies providing the same service in the markets affected by the transfer; 2) the percentage of customers in the affected markets which will be served by the company after the transfer; and 3) this Herfindahl- Hirschman Index (HHI) of market concentration.
The first two factors are relatively straightforward while the third is more complicated. The HHI is a commonly accepted measure of market concentration. The HHI is a formula which is calculated by squaring the market share of each firm competing in the market and then adding the squares. The purpose of considering this calculation in the effective competition analysis is to consider the relative size of the company compared to the number of companies serving the market. The change in the HHI created by the proposed transaction is considered in relation to the total HHI when evaluating the impact of a transaction on effective competition. The more companies that service a particular market, the lower the HHI, if only one firm serviced a particular market, the HHI would reach its maximum score of 10,000. The HHI is increased not only by a decrease in the number of firms in the market but also by an increase in the disparity in size between those firms.
Moreover, market concentration is not the only consideration when the NJDEP evaluates effective competition. It also considers among others, barriers to market entry, such as competitive pricing and vertical integration of the company after the transaction. A comprehensive list of the considerations can be found in N.J.A.C. § 7:26H-5.10.
If you are entering into a transaction to buy or sell A-901 assets, be sure to engage the services of an attorney who understands the intricasies involved. If you have any questions, call us at (973) 890-0004 or email us to schedule an appointment with our business attorneys.