Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

Fortnightly Magazine - June 1 1996

generation to meet these demands can be provided will be larger.

6. For a discussion of the structural conditions that affect the size and diversity of generation assets that may be necessary for each competitor, see, W. Brand, Public Utilities Fortnightly, Feb. 15, 1996, at 25 and 28.

7. The cost to provide transmission is distance-sensitive. Various methods to reflect distance-related costs in rates have been considered. An example is zonal rates, under which a transmitting utility charges a rate for each zone through which power is transmitted. A similar approach is to develop rates based on megawatt-miles of transmission. Although distance-based rates within a utility or power-pool system probably provide efficient transmission price signals, they also restrict the distance to which buyers can turn for alternate suppliers. Even if they were an improvement over postage-stamp rates, they would tend to maintain significant barriers to the entry of more distant suppliers.

8. Today, firm sales transactions that extend beyond VACAR (or similar areas) are not uncommon. This fact will not affect the analysis used by antitrust agencies because it reflects conditions that are distorted by regulation and the current industry structure. For example, the higher transmission costs of more distant transactions are not mitigated by the great differences in the cost of generation among utilities. These large differences arise from regulatory distortions that will be eliminated by deregulation and competition. The proper analysis will focus on long-run conditions under which differences in generation costs among competitors will be relatively slight. Similarly, today's market is characterized by excess capacity in some regions that permits transactions over greater distances, despite added transmission expense. Antitrust analysis focuses on structural conditions and, therefore, upon long-run equilibrium prices rather than the short-run supply imbalances that exist today and that often make it desirable for a seller to absorb additional transmission expense to sell excess capacity at a price that recovers at least some fixed costs.

9. Today the typical practice is to separate power into "capacity" and "energy" components similar in economic effect to the way that natural gas was once exclusively sold. A strong argument can be made that this separation is an artifact of regulation that will disappear upon deregulation. For a detailed analysis of the factors that influence whether, upon deregulation, an unregulated portion of a formerly bundled regulated service can trade as a commodity, see C. Legato, "The Role of Regulation in Risk Allocation," in Drawing the Line on Natural Gas Regulation, The Harvard Study on the Future of Natural Gas (J. Kalt, F. Schuller Eds. 1986) at 217-223.

10. Of the 22 potential mergers between investor owned utilities in MAIN that would not raise significant anticompetitive concerns, 19 include Upper Peninsula Power Co. (0.3-percent market share), Madison Gas & Electric (1-percent market share), or Central Illinois Light Co. (2-percent market share). The total annual megawatt-hour sales for each of these utilities range from 0.8 to 5.8 million. Upper Peninsula is the only utility that could merge with Commonwealth Edison, the largest utility, without raising competitive concerns or triggering the presumption that market