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Electric M&A: A Regulators Guide

Fortnightly Magazine - January 1 1996

combine utilities that operate in one or more states, thus placing the combined company under the jurisdiction of several state commissions as well as the Federal Energy Regulatory Commission (FERC). This naturally increases potential problems for the companies, and their respective PUCs, in allocating cost savings. Each jurisdiction will strive to claim the most cost savings, while attempting to belittle the allocation of any merger-related common costs. To simplify the process, regulators should consider forming joint committees among all states affected by a merger.

Cost-allocation problems may be compounded, given the complexities that arise due to changes in organizational structure and affiliate relationships between newly merged companies. As retail wheeling becomes more of a reality, regulators should be particularly attentive to cost allocations between regulated and unregulated subsidiaries, with an eye to potential cross-subsidies. Cross-subsidies should also be kept in mind when reviewing cost allocations between various market segments (e.g., residential, commercial, industrial, wholesale, and wheeling). To reduce abuses, PUCs should require strict reporting requirements, audit trails, and access to the books and records of all affiliated companies before approving any merger.

Competitive Effects

Typically, PUCs do not analyze the competitive implications of an electric utility merger (em particularly those that influence wholesale markets. Many regulators have left such issues to the FERC. But competitive (or anticompetitive) actions of the merged company (em even at the wholesale level (em can affect local retail customers. For instance, if a merger could be used to limit transmission access in a particular market area, ratepayers as a whole may suffer from higher purchased-power rates. From a retail perspective, establishing a barrier to entry before the advent of retail competition may be a way of locking up market share and locking out future competitors.

Some states have addressed concerns about merger-related impacts on competition. In its review of the Entergy/Gulf State Utilities merger, the Louisiana Public Service Commission noted that "the Commission should make sure that the merger does not present a threat of harm to competitors."5 The strongest review of the competitive implications of a proposed merger comes from the California Public Utilities Commission (CPUC), in its review of the Southern California Edison/San Diego Gas & Electric merger:


"[T]he weight of the evidence supports a finding that the proposed merger will have adverse effects on competition in three broad categories (wholesale transmission and bulk-power markets, and the area of affiliate transactions), and that with one exception, these adverse effects cannot be avoided through mitigation measures."6

The approach taken by the CPUC offers an excellent guide (em a thorough review of past actions, present market conditions, and the future potential actions that could be taken by the merged company. While jurisdictional considerations (i.e., federal versus state) may limit the ability of regulators to act upon their findings, they should, at a minimum, review all of the competitive implications of mergers and put the merged utility on notice that regulatory action will be swift if ratepayers are adversely affected by anticompetitive practices. t

David E. Dismukes is an assistant professor in the Center for Energy Studies