[BETA] Fortnightly

By Robert J. Michaels

The Justice Department's Guidelines don't tell us very much about

today's (or tomorrow's) electric market.

However many electric utilities remain after this merger wave, competition will be forever changed.

Earlier this year, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) on merger policy, seeking advice on how to adapt old practices to a changing industry.1 Then, in July, it voted 3-2 to require a hearing on the proposed merger of Baltimore Gas & Electric and Potomac Electric Power.2 The majority expressed concern that applicants had defined relevant markets too broadly and inferred competition where market power might exist. The dissenting commissioners favored approval without hearing, noting that no intervenors had presented substantive claims that the merger would increase market power.

Whether or not the FERC proceeds to a more activist policy on mergers, it must reevaluate the methods it uses to determine their effects on competition.

Competition:

Why Access Matters

In measuring market power, utilities, intervenors, and the FERC generally support use of the Horizontal Merger Guidelines developed by the U.S. Department of Justice.3 In today's environment, however, the FERC should question its continuing reliance on a tool that offers a particularly imprecise match for today's power industry.

Rather than accept a consensus among respondents to the NOI, the FERC should question why those respondents hold dramatically differing interests and yet remain nearly unanimous in their approval of the Merger Guidelines. It may be that the Guidelines just as easily facilitate a showing of competition by a utility with market power as they do a showing of market power by an intervenor that fears competition.

Tomorrow's markets will prove quite unlike today's. If so, the FERC must defend competition both in current markets and those still to be invented, yet the

Guidelines prove unhelpful for either task. If the antitrust agencies defer to the FERC's expertise, they should expect the FERC to build better analytical screens than the borrowed Guidelines. One potentially superior approach would examine a merger's effect on access to transmission. In fact, beyond its voluminous treatment of open access, FERC Order 888 actually contains the basics of a sound merger policy.

The fundamental difference between competition and monopoly is that a monopolist can profit by reducing output and raising prices, while a competitive seller cannot. If lower-cost competitors can easily enter a monopolized market, the monopolist can only continue to profit by blocking its customers and competitors from trading with each other. Open access mitigates monopoly power in transmission by denying the utility discretion over the allocation of lines among users. The open-access utility recovers its costs in contracts for capacity rights, but users can reassign rights among themselves at mutually agreed-on prices. (Order 888 contains price caps on reassignments.) Because open access requires the utility to offer unused capacity for short-term (possibly interruptible) service, any attempt by users to hoard capacity rights becomes self-defeating. The more capacity users try to withhold, the more reliable the line owner's services will be. Open access makes the owner a competitor who instantly acquires