July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Deregulation and Mergers: Is Consolidation Inevitable?
Antitrust is not another form of regulation. Antitrust
is an alternative to regulation
and, where feasible, a better alternative.
(em Stephen G. Breyer,
"Antitrust, Deregulation, and the Newly Liberated Marketplace,"
75 Calif. Law Rev. 1005, 1007 (1987).
As the electric power industry moves toward deregulation and a regime of competition, a giant regulatory inquest has begun, invoking antitrust principles to avoid allowing any anticompetitive concentration of ownership and control. The competition that is contemplated for the electric power industry is, of course, in the market for electric generation.
But what has not been much addressed is the crucial circumstance that electric generation has never before operated in a competitive environment.1 We know little about the "natural" structure of the industry. And little of the discussion has looked to experience in other regulated industries that have been deregulated and where there is abundant evidence of the kind of structural change that typically follows upon deregulation.2
What needs to be borne in mind about the process of deregulation is that it provides a whole new environment calling urgently for structural change. One commentator discussing an entirely different, but formerly regulated, industry, has noted that "mergers are nearly inevitable in the deregulated environment. ... To the extent that mergers yield more efficient operations (em or shield [companies] from ... ruinous rivalry (em mergers will be encouraged by the threats to survival."3
Good reason exists in the case of regulated industries to question the classic view that industry structure gives rise to specific types of conduct. In fact, in regulated industries there is reason to believe that the opposite is true. In going from a regulated to a deregulated status, the regulated industry starts from a position far from equilibrium and must develop a new pattern of conduct leading to equilibrium.4
In these circumstances, conduct may dictate the new industry structure as much as structure determines conduct. The analysis must be dynamic rather than static.5
Changing Risk, Changing Conduct
The change of conduct involved here flows from an increase in risk and demand for efficiency.6 A regime of competition among electric generators means building generation without a guaranteed market; there is no precedent for this. Since the very idea of a generator's being completely at risk for a market is novel, one can certainly expect vigorous efforts to seek security in combination.
In the past, markets were guaranteed either by vertical integration, by purchase obligation under the Public Utility Regulatory Policies Act, by long-term contract or by some other means. In Great Britain, for example, when the nationally owned electric system was privatized, extensive efforts were made to protect the new privately owned generating entities against the rigors of a vigorously competitive market. Steve Thomas reports:
"While an unexpectedly large number of new generation companies emerged, all were protected by [contracts for differences]. Thus the Pool price was almost invariably set by the two large generation companies. ... The mere fact of [a price agreement forced on the two large generating companies by the Regulator] proves that the Pool lacks true competition."7
Electrical generation is the