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Electric Mergers: Transmission Pricing, Market Size, and Effects on Competition

Fortnightly Magazine - June 1 1996

restructuring will create a commodity market in which all power is sold at a single price that fluctuates in hourly blocks, and that current long-term contracts will be revamped as they were in the gas industry upon deregulation of the pipeline's merchant function.9 The use of each utility's annual sales data as the measure of productive capacity and ability to respond to market demand is a simplification that, if anything, understates concentration compared to examining each utility's capabilities in 8,760 hourly blocks or at the time of the region's coincident peak demand.

As shown in Table 1, the total HHI for the VACAR market is 2,279 (em well above the 1,800 threshold. Table 2 shows further how a merger of Duke with SCE&G would boost the HHI by over 527 points (em 10 times the increase of 50 that will cause a merger in such a market to be challenged under the Merger Guidelines. Even a merger between the two investor-owned utilities with the smallest market shares, SCE&G and Carolina Power & Light Co., would increase the HHI by 306.

The MAIN region holds a larger number of competitors. Even so, it carries an initial HHI of 1,896 (see Table 3). That level is still so highly concentrated that few mergers could escape challenge. A merger between Central Illinois Public Service Co. and Illinois Power Co., two utilities with average market shares, would increase the HHI by 108 (see Table 4).

The only permissible mergers between investor-owned utilities within MAIN would involve very small utilities. Almost 90 percent of those permissible mergers would include one of the three smallest utilities, which have individual market shares of between 0.3 and 2 percent.10

Thus, even a market defined to encompass a region the size of MAIN, arguably the largest area that could be designated a market in light of the effect of single-system transmission prices on efficiency, could not bear mergers between any utilities that are not unusually small. With this definition of a relevant geographic market, none of the recent mergers of sizable interconnected electric utilities could survive serious antitrust scrutiny.

The Merger of the Future

Regardless of the policy that FERC adopts with respect to merger approval, insouciance on the part of the antitrust agencies will not likely persist for long. The FTC and DOJ are already investigating how the industry will be structured after deregulation. Having studied the transition to deregulation in other industries (em

notably natural gas, telecommunications, and banking (em the DOJ can be expected soon to challenge mergers that increase concentration in already highly concentrated markets. Furthermore, before the industry restructuring is completed, regulators or legislators may subject recently merged utilities to significant divestiture of generation assets.11

Does this mean that the consolidation is over in the electric utility industry? Not necessarily. Further consolidation of transmission and distribution assets appears necessary and desirable. Because transmission and distribution assets will continue to be regulated as to access and price, mergers to consolidate them will not create the same potential for anticompetitive harm (em nor will the acquisition by generation