[BETA] Fortnightly

You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.

But some economists take a different view. They see the real convergence occurring between electricity and telecommunications. I'm not talking about the "smart house" or fiber-to-the-whatever. Instead, how is the product is created? Electric utilities and telephone carriers share some common attributes (em a product you can't control, inventory you can't store, and a nonlinear transmission network tying it all together (and probably underpriced) that creates economies and value. The Internet provides the classic example: All network and no product.

Scott Neitzel, a member of the Wisconsin PSC, puts it this way: "The obligation to serve will convert to an obligation to connect. Utilities will simply energize the wires."

Read the Tea Leaves

Early last month, at EXNET's Ninth Annual Utility Mergers and Acquisitions (M&A) Symposium, held as usual at the Plaza Hotel in New York City, I grabbed a seat at lunch and listened to Commissioner William L. Massey's thoughts on merger policy at the FERC. Just one day earlier, on January 31, the FERC had released its order denying immediate approval of the Primergy merger between Wisconsin Electric Power Co. and Northern States Power Co. (Docket No. EC95-16-000).

Massey hinted that anyone curious about the FERC's future direction should study the Primergy order. "Read the tea leaves," he advised. Massey repeated his well-known concern about antitrust analysis and market concentration in the electric generation sector. But he also showed particular interest in transmission bottlenecks. He brought up the not-uncommon practice of merger partners offering an "open season" on bulk-power procurement to allay fears of any possible future price manipulation by the merged company. Massey, however, suggested that such open-season offers might prove hollow: "Suppose many of the competitors of a merging company are on the other side of a transmission constraint controlled by that company. . . . FERC may have to discount the availability of the competitors' power in its generation dominance analysis."

It was that last point (em generation dominance (em that provoked the most interesting question after lunch. That question came from Michael M. Schnitzer, now managing director at The NorthBridge Group, a Harvard-educated chemist who formerly worked as managing director at Putnam, Hayes & Bartlett.

Schnitzer asked whether generation is too concentrated or whether electric transmission rates are simply too high. "When transmission prices are set too high," says Schnitzer, it discourages certain long-range power transfers and "shrinks the apparent geographic market." With a smaller market, he explains, "The problem of generation concentration arises sooner than it would otherwise."

Neitzel echoed that view. "The key is market size," he said. "If the market is the Eastern Interconnection, then you will probably be OK. But if the market is Wisconsin, then it will be pretty easy to get your HHI (Herfindahl-Hirshman Index) above 1,800. And the key to market size is transmission policy." Neitzel continued: "So in a sense, merger activity is a response to the market getting larger."