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Management: Merge,. Divest, or Both?

Fortnightly Magazine - June 1 1996

the FERC.

s Merger Magic

"There was a long period until the sixties when it was believed that bigger was better and mergers might therefore give advantages of bigness, economies of scale. That has been recognized

no longer to be true. And whatever the optimum size is, it's relatively limited in generation. Therefore, mergers that would go much beyond the minimum sense of scale necessary to operate efficiently bear a burden of proof to show they overcome the 'diseconomies' of scale."

s Debt Service

(Long silence.) "Mergers and divestitures are opposites, so you're asking: Would either or both of them raise capital costs, and make it more difficult or risky to function at the generation level? The shortest answer is 'We don't know for sure either way.' That depends on the lenders, on the financial markets, whether a merger or divestiture will go against the firm's prospects in the long run. And that's a two-sided issue (em both for horizontal and vertical mergers. It may even be somewhat case-specific. Mergers in Wisconsin may have some features that differ from mergers in Missouri or New York or wherever."

s Hard Numbers

"Less than now. But I suppose the implicit question is 'Are we going to sift down to just five or six or even fewer and face a truly heroic concentration in the market? . . . My guess is that wouldn't, and shouldn't, be permitted because you need at least five competitors to make a market reliably competitive.

"The TransCos would [follow the] same principles. . . . You really can't have less than five comparable competitors in a market and expect competitors to be strong. Defining the market will be, as in antitrust generally, the decisive step. And there you'll get the usual debates: that the market is only an inch wide, or that it's a mile wide.

s Disaggregation

"All you've done is left the same basic number of players, except each one is on one level now, rather than three. . . . So the first step is: Don't let mergers run freely. That's the universal response to any advent or likelihood of new competition: Quick. Let's merge.

"The more balanced thing is to wait and look it over carefully, first. But even there, the antitrust agencies that apply what they think are reasonable merger criteria can make mistakes. And they can be bullied or pushed or stampeded or overwhelmed into letting more mergers go through than they really should." t

William G. Shepherd, professor of economics at the University of Massachusetts in Amherst, recently authored "Applying Antitrust to Mergers in the Electricity Industry." The paper was an appendix to a joint petition of the American Public Power Association and the National Rural Electric Cooperative Association, filed with the FERC. Mr. Shepherd is general editor of the Review of Industrial Organization, a research and policy journal.

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