ACP and World Enrichment Market
Presentation for U.S. Department of Energy
Edward Kee
Jennifer Cascone-Fauver
Vice President
Senior Consultant
16 October 2013
Assignment
 NERA was retained by USEC to study the ACP’s
impact on competition in enrichment supply
 NERA used a competition/antitrust analytical
framework, similar to what global competition
authorities would use to analyze a merger
 The results of NERA’s study were provided to
USEC on September 5, 2013
1
Summary of Conclusions
Absent Commercial Deployment of
the ACP
With Commercial Deployment of
the ACP
U.S. utilities will be totally dependent
on foreign-owned (including Russian)
suppliers of enrichment
A U.S.-owned and located supplier of
enrichment to the world market is
guaranteed
Non-ACP enrichment suppliers will
have increased market power
Competition in enrichment supply will
increase
Higher risk of anti-competitive
behavior by the remaining (non-ACP)
enrichment suppliers
Reduces the risk of coordination and
anti-competitive behavior by non-ACP
suppliers
An increased risk of higher
enrichment prices and less attractive
contract terms for buyers
Helps ensure competitive enrichment
prices and reasonable contract terms
for buyers
2
Global Enrichment Supply in 2012
 90% share from 4 suppliers: AREVA, TENEX,
URENCO, USEC
 3 suppliers if URENCO and AREVA linked
– ETC joint venture (manufactures centrifuges)
– Cooperative business arrangements
– As a single supplier, URENCO/AREVA supply a large
share of enrichment (~45%)
 Loss of the ACP reduces suppliers from 4 to 3 (or
from 3 to 2 if URENCO and AREVA are considered
as a single supplier)
3
Framework for NERA’s Analysis
 NERA used the framework described in the U.S.
Merger Guidelines
– We treated ACP loss like a merger that resulted in
complete elimination of a competitor’s output/capacity
 Relevant product market is enrichment
– Limited substitution for enrichment in response to
somewhat higher prices
 Relevant geographic market is the world
– But, trade restrictions and other factors suggest that U.S.
enrichment market alone should also be studied
4
Measuring Concentration Levels
 Herfindahl–Hirschman Index (“HHI”): equal to the sum of squared
market shares: Firma2 + Firmb2 + . . . + Firmi2
 US merger guidelines partition markets by HHI (level) and delta*:
Presumption of significant
anticompetitive effects
Delta
> 200
Possibility of anticompetitive
effects; would warrant scrutiny
200
Does not raise concern
100
0
1,500
Unconcentrated
*Delta = HHIpost-merger – HHIpre-merger
10,000
2,500
Moderately
Concentrated
Highly
Concentrated
Pre-Merger HHI Level
5
NERA Analysis
Calculate Baseline Concentration
Levels (HHIs)
 NERA calculated baseline HHIs for 2020 (world and U.S.) and
2025 (U.S. only) with the ACP in commercial operation
– World market with ACP is close to being classified as highly concentrated
(2,500), while the U.S. enrichment market is highly concentrated
World
Enrichment Supply
2020 2025
Share Share
U.S.
Enrichment Supply
2020 2025
Share Share
TENEX
30%
--
TENEX
15%
28%
URENCO
30%
--
URENCO
59%
50%
AREVA
15%
--
AREVA
4%
4%
China & Japan
14%
--
China & Japan
0%
0%
USEC (with ACP)
10%
--
USEC (with ACP)
22%
19%
HHI: 2,357 (2020)
HHI: 4,231 (2020); 3,609 (2025)
Source: NERA Report, Figures: IV-1 (page 51); IV-4 and IV-5 (page 56).
7
Scenarios without the ACP
 NERA reviewed 7 scenarios where expected
ACP supply (3.8 million SWUs/year) replaced by:
– #1 – TENEX
– #2 – TENEX & URENCO (half each)
– #3 – TENEX & AREVA (half each)
– #4 – URENCO
– #5 – AREVA
– #6 – URENCO & AREVA (half each)
– #7 – AREVA (after acquiring all of URENCO – this
also reflects a view that AREVA and URENCO act as
a single supplier)
8
2020 Results for World
Enrichment
World Enrichment
Scenario without the ACP
2020
HHI
2020
HHI Delta
from
Baseline
(2,357)
1. TENEX
2,688
331
2. TENEX + URENCO (half each)
2,665
308
3. TENEX + AREVA (half each)
2,573
216
4. URENCO
2,681
324
5. AREVA
2,499
142
6. URENCO + AREVA (half each)
2,570
213
7. AREVA/URENCO (as one company)
3,800
1,443
Source: NERA Report, Figure: IV-2, page 52.
9
2020 & 2025 Results for U.S.
Enrichment
U.S. Enrichment
Scenario without the ACP
2020
HHI
2020
HHI Delta
from
Baseline
(4,231)
2025
HHI
2025
HHI Delta
from
Baseline
(3,609)
1. TENEX
4,689
458
4,651
1,042
2. TENEX + URENCO (half each)
5,329
1,098
4,885
1,276
3. TENEX + AREVA (half each)
4,300
69
4,024
415
4. URENCO
6,311
2,080
5,472
1,863
5. AREVA
4,254
23
3,749
140
6. URENCO + AREVA (half each)
5,111
880
4,434
825
7. AREVA/URENCO (as one company)
6,887
2,656
5,985
2,376
Source: NERA Report, Figure IV-6, page 57 and Figure IV-7, page 58.
10
Anticompetitive Effects are Likely
Absent Mitigating Circumstances
 Results are mostly outside of the “safe harbors” used by
competition authorities in merger situations
7
Delta Without the ACP
(Change from Baseline)
7
7
1,2,4 2,4,6
World 2020 Scenarios
> 200
3,6
1-4,6
1
U.S. 2020 Scenarios
200
5
5
U.S. 2025 Scenarios
100
3,5
0
1,500
Unconcentrated
10,000
2,500
Moderately
Concentrated
Highly
Concentrated
HHI Level with the ACP (Baseline)
11
Anticompetitive Effects are Likely
Absent Mitigating Circumstances
(continued)
 Without the ACP, enrichment suppliers:
– May be able to earn substantial profits by coordinating
pricing and other actions
– Are less likely to be constrained by a pricing response
from competing enrichment suppliers
– Would have incentive to raise prices and increase
profits rather gaining market share with lower prices
 Without the ACP, enrichment buyers face
increased risk of higher enrichment prices and
less favorable contract terms
12
New Entry is an Important Issue
 New entry can alleviate concerns about competitive
effects if such entry will deter or counteract (mitigate)
the anticompetitive effects of concern
– High prices tell entrants there are profits to be made and
thus, drive new entry
– Prices needed for new entry constrain the prices charged
by incumbent suppliers
 A market with high barriers to entry:
– Reduces constraints on market price, since incumbent
suppliers do not fear competition from a new supplier
– Provides opportunity for incumbent suppliers to profitably
raise prices or offer less favorable purchasing terms
13
There are High Barriers to Entry
in Enrichment
 A new (de novo) supplier of enrichment or enrichment
technology is unlikely by 2020 or 2025
– Significant time to develop and deploy new technology
– Large capital investments are required
– Limits and controls imposed by NPT, nuclear safety regulation,
trade restrictions, etc.
 If new entry is feasible, new entrant prices likely to be
high due to capital investment and limited initial output
– Example is Resende (centrifuge facility in Brazil):
 Full levelized costs estimated to be $160 per SWU
 2 x cost for existing Western facilities
 3 x cost for existing Russian facilities
14
Enrichment Industry Has High
Barriers to Entry (continued)
 Any additional capacity will be added by existing
suppliers at existing facilities (e.g., LES and
GBII), using already developed technology
– These are the same suppliers that have, absent the
ACP, the market power to demand higher prices from
enrichment buyers in exchange for guarantees that
sufficient enrichment capacity will be available
 New capacity additions by existing suppliers will
not make enrichment market more competitive
15
Conclusions
 Enrichment market without the ACP will:
– Have greater supplier concentration and result in
changes in concentration that would raise concerns in
a merger situation
– Have more supplier market power
– Increase buyer risk of higher enrichment prices.
 Enrichment market with the ACP will:
– Increase market competition
– Likely result in benefits to enrichment buyers
– Add domestic supplier for U.S. enrichment buyers
16
Appendix
Sample HHI Calculation
 Takes into account the number and relative size
distribution of the firms in a market and increases both as
the number of firms in the market decreases and as the
disparity in size between those firms increases.
– Large number of firms: HHI → Zero
– Monopoly (one firm): HHI → 10,000 points
 Sample calculation
Market
Share
HHI
(Points)
Firm #1
30%
302
Firm #2
30%
302
Firm #3
20%
202
Firm #4
20%
202
100%
2,600
Firm
Total
18
2012 World Enrichment Market
Shares
Source: NERA Report, Figure II-2, page 17.
19
2012 World Enrichment Market
Concentration
Source: NERA Report, Table II-4, page 20.
20
2012 U.S. Enrichment Market
Shares
Source: NERA Report, Figure II-3, page 19.
21
2012 U.S. Enrichment Market
Concentration
Source: NERA Report, Table II-5, page 20.
22
2020 World Enrichment Market
Shares – Baseline with the ACP
Source: NERA Report, Figure III-3, page 43.
23
2020 World Enrichment Market
Concentration – Baseline with the
ACP
Source: NERA Report, Table IV-1, page 51.
24
2020 World Enrichment Market
Concentration – Scenarios without
the ACP
Source: NERA Report, Table IV-2, page 52.
25
2020 U.S. Enrichment Market
Shares – Baseline with the ACP
Source: NERA Report, Figure III-4, page 44.
26
2020 U.S. Enrichment Market
Concentration – Baseline with the
ACP
Source: NERA Report, Table IV-4, page 56.
27
2020 U.S. Enrichment Market
Concentration – Scenarios without
the ACP
Source: NERA Report, Table IV-6, page 57.
28
2025 U.S. Enrichment Market
Shares – Baseline with the ACP
Source: NERA Report, Figure III-5, page 45.
29
2025 U.S. Enrichment Market
Concentration – Baseline with the
ACP
Source: NERA Report, Table IV-5, page 56.
30
2025 U.S. Enrichment Market
Concentration – Scenarios without
the ACP
Source: NERA Report, Table IV-7, page 58.
31
Contact Us
Edward Kee
Jennifer Cascone Fauver
Vice President
NERA - Washington, DC
+1 202 370 7713
[email protected]
Senior Consultant
NERA - Washington, DC
+1 202 466 9233
[email protected]
© Copyright 2013
National Economic Research Associates, Inc.
All rights reserved.