[BETA] Fortnightly

The prospect of deregulation has induced a wave of mergers among electric utilities. Most of these mergers would fail an antitrust review because, by combining generation assets of interconnected utilities, they have substantially reduced potential competition in generation. In fact, one can predict that most mergers of utilities that operate within the same power pool or reliability region will be anticompetitive, even if they are not interconnected.

Mergers of interconnected utilities can, and generally will, create or exacerbate undue concentration of ownership in the market for the generation and sale of power, which will dampen competition upon deregulation.

The Federal Energy Regulatory Commission (FERC) so far has focused its review primarily on static cost savings. It has addressed competitive concerns only by imposing as a condition of approval that the merged utility file an open-access transmission tariff with a single-system rate for all companies under its direct or indirect control.

This approach fails to prevent undue concentration of generating assets, given an industry structure in which electric power transmission will be "unbundled," at least functionally, from power production and local distribution. It stands at odds with the policy objectives that underlie the FERC's recently issued rule (Order No. 888) on open-access transmission service, and with the proposals of federal legislators and a number of states.

Using an antitrust analysis, this article illustrates the potential anticompetitive effects of mergers between interconnected electric utilities. It concludes that the relevant geographic market will be an area in which a single, area-wide transmission price is charged. Moreover, it concludes that this area and, hence, the relevant market will likely span an area no larger than the Mid-American Interconnected Network (MAIN), or the Virginia/Carolina (VACAR) subregion of the Southeast Regional Reliability Council. Assuming markets of this size, the data on resulting concentration will show severe consequences for mergers of the sort that were announced in 1995 and 1996.

In fact, given these conclusions regarding the size of the relevant market for antitrust analysis, none of the recent mergers of sizable interconnected utilities could survive serious scrutiny.

The Horizontal Merger Guidelines

The Merger Guidelines1 used by the Department of Justice (DOJ) and the Federal Trade Commission (FTC) focus primarily on the pre-merger concentration of relevant markets and the extent to which a proposed merger would increase that concentration.

The DOJ and FTC first define the relevant product and geographic markets, then measure concentration within those markets to determine the proposed merger's effect on competition.

The Guidelines define the relevant geographic market by isolating the area to which consumers may turn for alternative supplies if subjected to a permanent price increase of 5 percent. For electric power consumers, the delivered cost typically will rise by more than 5 percent if even a single additional transmission charge is incurred to bring in power from more distant generators. For example, when each transmitting utility charges a "postage-stamp" rate for transmission,2 a buyer purchasing from a distant market must absorb the transmission charges imposed by more than one transmitting utility. These so-called "pancaked" transmission rates form a barrier to competition because the