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FERC Begins Inquiry, Gives Guidance in "Primergy" Order

Fortnightly Magazine - April 1 1996

The Federal Energy Regulatory Commission (FERC) has announced that it will revisit its 30-year old electric utility merger policy (Docket No. RM96-6-000). The Notice of Inquiry (NOI), Merger Policy Under the Federal Power Act, also orders an expedited hearing on the proposed merger between Wisconsin Electric Power Co. (WEPCO) and Northern States Power Co. (NSP) to form "Primergy" (Docket Nos. EC95-16-000, ER95-1357-000, and ER95-1358-000).

The NOI requests comments on how to evaluate proposed mergers in an open-access environment, noting that several commenters on the open-access Notice of Proposed Rulemaking argued that the FERC's current Commonwealth factors should be updated [Commonwealth Edison Co., 36 FPC 927(1996), aff'd sub nom. Utility Users League v. FPC, 394 F.2d 16 (7th Cir.1968), cert. denied, 393 U.S. 953 (1968)]. That case set forth six nonexclusive evaluation factors. However, the FERC attributes the commenters' concerns to the possibility that mergers may create "mega-utilities" that will enjoy market power in generation (em particularly if they are able to avoid the pancaked transmission rates their competitors must pay.

In the order setting the proposed Primergy merger for hearing, the FERC asks the parties whether generation market power might result from the concentration of generation ownership, despite open transmission access. The parties also were directed to evaluate the impact of their proposed use of an Independent Tariff Administrator (ITA).

The FERC is concerned that NSP and WEPCO have not adequately demonstrated merger savings. The two utilities intend to offer an open season that would allow wholesale requirements customers to switch suppliers any time the utilities file for a rate increase during the first four years after the merger. They also plan to reduce retail rates by 1.5 percent, effective January 1, 1997, and then freeze retail rates through 2000. But the FERC found the proposal inadequate, offering the utilities a choice between committing to a wholesale rate freeze for four years after the merger or proceeding to a hearing on the benefits of the merger.

Commissioner Vicky A. Bailey pointed out that the FERC was using only one of the six Commonwealth factors (em effect on competition (em to evaluate the Primergy merger. Bailey added that the FERC would demand no hearing on cost and benefits if the utilities agreed to the rate freeze.

Noting that it was "no secret that there is some diversity among the FERC commissioners," Commissioner Donald F. Santa, Jr. expressed hope that the Primergy order will allay industry fear over the status of current mergers. Santa noted that Primergy's opportunity to avoid an open season with a four-year rate freeze was not intended as a rule on what it takes to get over the 'benefits' hurdle of Commonwealth. t

Inside Washington items were reported by Lori A. Burkhart, an associate legal editor of PUBLIC UTILITIES FORTNIGHTLY.

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