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Mergers and Market Power: Should Antitrust Rule?

Fortnightly Magazine - October 15 1996

complements that must be combined to produce delivered power. A utility with open lines might still be able to compel wholesale customers to take overpriced power, but under universal open access this event becomes less likely.

Open access also turns transmission and generation into substitutes for each other. Instead of using Utility A's lines to carry power from point X, a user can employ Utility B's lines to reach a source at Y. Utility B's lines substitute for both Utility A's lines and for power produced at X. If open access thus mitigates market power in both generation and transmission, market definitions and criteria for monopoly power must change.

The FERC should concentrate on how mergers affect competition for access to transmission. The relevant market is the market for access to the market in which electrical commodities are traded. We do not know today the future shapes and sizes of these latter markets, or the exact commodities that will be traded in them. The public interest requires the FERC to monitor both competition in existing markets and competition to invent new transactions and form new markets. In only a decade, open access to gas pipelines has unified the country's gas markets and spawned transactions beyond the imaginations of both the FERC and the market participants of 10 years ago.4 Open access to electrical transmission will surely do likewise.

Transmission access is the one constant behind whatever markets will come, and it is there that the FERC will likely make its best contribution to competition. Utilities and their customers will surely have disputes over the administration of open access that the FERC is well-suited to arbitrate. Both owners and users of a complex commodity like transmission will sometimes have legitimate misunderstandings and sometimes attempt to capture questionable gains from each other. Whatever the antitrust scrutiny applied to mergers, antitrust alone will neither forestall nor resolve these necessary speed bumps on the road to competition.

What the FERC Does Best

An activist merger policy at the FERC is not necessarily one that follows the Guidelines and interprets their numerical criteria stringently. The FERC would do better to perfect open access in the industry as it now exists instead of waiting for the inundation of retail wheeling and then hacking at the details.

The Guidelines offer, at best, an illusory precision in measuring markets that will likely remain relevant only as long as current federal and state regulatory practices persist. Any utility, intervenor, or regulator will gladly give an opinion about how different tomorrow's markets will be from today's. Each of their visions, however, will differ from those of the others. If so, why apply the Guidelines to markets that everyone knows will not be around long, particularly when no one knows what will replace them? The FERC understands open access, and access is what really matters for competition. t

Robert J. Michaels is professor of economics at California State University, Fullerton, consultant in economics and finance with JurEcon, Inc., and adjunct scholar of the Cato Institute. The views expressed in this article are not