Nowhere are the failings of traditional utility regulation more evident than on Long Island. The New York Public Service Commission (PSC) has raised rates for the Long Island Lighting Co. (LILCO)...
Is Bigger Better? Market Power in Bulk-Power Supply: From FDR to NoPR
203 of the Federal Power Act was applied in the GSU-Entergy merger case.17 That standard was, in my humble view, far from what was intended by the framers of the 1935 Public Utility Act. This recent standard does not require a showing of benefit to the public from the merger, only that it is "consistent with the public interest."18 This standard places a burden on the opponents of merger to show a detriment to the public interest, whereas the premise of the 1935 Act was that "bigger is badder," unless offset by added scale economies available only from horizontal integration of electric utility systems.19
In fact, in the first cases it tried under section 203, the Federal Power Commission (predecessor to the FERC) actually applied a standard that required proof of scale economies from system integration, but was reversed in the courts by the Ninth Circuit.20 It does not appear from the decision that the Ninth Circuit was apprized of the relationship of unit size, system size, reserves, and reliability that was the raison d'etre for the '35 Act's basic concept of justifiable scale (em that federal policies should permit the formation and continued existence only of those holding companies whose operating properties were integrated through their own transmission, because only such companies could achieve scale economies.
Nevertheless, hope springs eternal. In late November, perhaps mindful of the warnings from Commissioner Massey, the FERC showed indications of moving back to a standard that would require merger proponents to prove scale economies from system integration. In a preliminary hearing in the proposed Altus merger between The Washington Water Power Co. and Sierra Pacific Power Co., the FERC declined to issue approval and instead granted motions to intervene and consolidate the proceedings for hearing and decision. In its draft opinion, the FERC noted that the merger appeared to achieve no fuel savings related to integrated operations and central dispatch. It added, in fact, that because of their geographic separation, the two companies "will be operated as two separate electric control areas and will not be jointly dispatched as a single integrated system."21
The Antitrust Analysis
The dangers of market concentration in wholesale power demand closer attention by regulators. At the federal level, the FERC could start applying sound antitrust policy by investigating those engineering and economic factors it is uniquely qualified to determine: optimal baseload unit size, the amount of reliability required for commercially acceptable firm power (measured in terms of the "loss of load" or "loss of capacity" probability methods), and how low a reserve percentage must be maintained to be price competitive. With these parameters and an estimate of annual load growth, it could determine the optimal system size absent institutional arrangements such as "reserve sharing" or the "coordinated development of base-load units." Then it could downsize optimal company size to take into account the availability of those institutional arrangements. The affidavit of Mr. Sylvan Richard, which was submitted to the commission by the Louisiana Energy & Power Authority in support of its Reply Comments in the Mega-NOPR rulemaking (FERC Docket No.