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Frontlines

Fortnightly Magazine - March 15 1996

But the problem, of course, is that everything is a moving target. The Mega-NOPR promised to create a competitive market by unbundling transmission from generation. Now, with competitive power pools emerging (the California Power Exchange, plus proposals at PJM, NEPOOL, and American Electric Power Co.), the utilities themselves appear to be rebundling generation with transmission. Can the system operator stay independent?

Lawyer Lon Bouknight, a principal in the ill-fated merger between San Diego Gas & Electric Co. and Southern California Edison, summed up the problem: "When you operate the transmission network, what you are really doing is dispatching generating plants. So how can you separate the two?"

Let 'er Rip

A month earlier, at the annual meeting of the American Economic Association in San Francisco, professor William Shepherd (University of Massachusetts) delivered a paper to the association's Transportation and Public Utilities Group, entitled "Mergers, Consolidations, and Antitrust Policies in Network-based Markets." Shepherd argued (five weeks before the President signed the new telecommunications act) that deregulation and antitrust oversight have failed to produce telephone competition, and will likely fail in the electric arena: "[T]elecommunications has since the 1950s been something of a strange cuckooland, full of illusions and pie-in-the-sky hype; and electricity now seems to be catching that disease, too."

Shepherd continues: "Antitrust has become a weak cure . . . for complex mergers of the types now arising in telecommunications and electricity. [These two sectors] call for much deeper changes toward competition than now seem to be in prospect. . . . [P]remature deregulation may entrench dominance further, blocking the chances for genuinely effective competition."

When the American Public Power Association and the National Rural Electric Cooperative Association filed their joint petition asking the FERC to revise its merger approval standards under Federal Power Act section 103 (Docket No. RM96-8-000, filed Jan. 17, 1996), they attached a 32-page appendix by none other than the same professor Shepherd, entitled "Applying Antitrust to Mergers in the Electric Industry," which advanced many of the same arguments as the San Francisco paper.

In the joint APPA-NRECA filing, Shepherd counsels against too much reliance on antitrust oversight: "The antitrust agencies, on their part, should not be counted on to see and avoid the dangers. They are thinly staffed, lacking in electricity expertise, and scantily informed about the dramatically changing terrain in the electric industry."

The urge to merge can be irresistible. Del Hock (chairman and CEO, Public Service Co. of Colorado), admitted as much at the EXNET M&A conference in New York. "If your monopoly business becomes competitive, one result is certain," says Hock. "You will lose market share. Thus growth is critical."

Professor Shepherd needs more convincing. "Beware loose talk and smooth assurances," he warns. "If you just open up dominated markets and 'let 'er rip,' the ripping will probably hit consumers and small rivals."

Editor

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