(September 2009) The industry’s best companies are weathering the financial storm reasonably well, with the F40 delivering equity returns in the 14-percent range for fiscal 2008....
Hurdling Ever Higher: A New Obstacle Course for Mergers at the FERC?
utilities have open access?"17 The argument seems to be that having achieved throughout the industry what merger policy of the 1980s sought to achieve only on a case-by-case basis, the FERC must now raise its competitive sights to a higher level.
The reasoning runs backwards: If transaction-specific open access adequately offset any generation concentration associated with past mergers, the problem should be further diminished once open access becomes the industry norm.
The message appears to be that some within the FERC are simply not finished doing all that they believe must be done to improve the industry; the ante for playing in the merger game must go up again. Viewed this way, a more intrusive FERC merger policy could offer an easy means of fine-tuning regulation in favor of new market entrants.
For potential merger partners, this approach also evidences a potentially harmful tendency to generalize about market definition and market analysis, and to use those generalizations to expand the reach, if not the rigor, of FERC merger analysis. Even the Department of Justice comments on the FERC Mega-NOPR recognize that open access is likely to broaden the relevant geographic market for generation by alleviating some of the impediments to wholesale wheeling.18 As a result, open access is likely to lower concentration in generation markets and, thus, reduce the risk that market power will be exploited.
Regulators should avoid a static view of competition in the industry, particularly in an industry involving approximately 715 generator owners, including 234 exempt wholesale generators.19 The case certainly has not been made for a new merger standard around the untested (and probably incorrect) presumption that competitively harmful generation concentration will be the order of the day if utility mergers are allowed. Without seriously and carefully factoring in the broadening of the geographic market for generation that is taking place on the heels of the FERC's own unprecedented requirements for generic transmission tariffs, regulators will be required to manage the structure of the industry forever (em searching for a structure that promotes "robust wholesale competition" that is in the "public interest."
The prescription for precise doses of managed competition may be very simple, and not at all surprising. Without waiting for the therapeutic results of transmission comparability, some would bring the industry back to the operating table for the type of surgery applied by the FERC's merger conditions in the 80's. About this treatment regime, Commissioner Massey has mused over the idea of forcing merger partners to turn their transmission systems over to an independent system operator (ISO) to mitigate market power.
Industry executives and counsel have heard the message. And, perhaps with an eye toward the conditioning authority developed in the Utah Power and Light Co. case, utilities have included the ISO concept in merger applications as well as their own public pronouncements about the future of the industry.20 Thus, once again, change in FERC merger policies could prove both a catalyst to action and a prelude to more restructuring.
THE SAVVY RUNNER
As an informed student of the industry, Massey is correct in observing: "The