July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
FERC Issues Long-Awaited Merger
More than a year and a half after commissioners Hoecker and Massey first raised eyebrows in various concurring and dissenting opinions by suggesting changes in the merger approval process for electric utilities, the Federal Energy Regulatory Commission (FERC) on December 18 issued Order 592, a "policy statement" designed to "update and clarify" the criteria it will use to ensure that mergers remain consistent with the public interest.
Backing away from the historical six-part merger approval test established in 1966 in the Commonwealth Edison case, the FERC announced that it would approve mergers based instead on three factors: The effect of the merger on competition, on customers (wholesale rates for instance), and on regulation (e.g., conflicts with state regulation, or with the Securities and Exchange Commission arising out of the Ohio Power doctrine). As expected, the new policy introduces antitrust law principles into the merger approval process, by in effect adopting the Merger Guidelines developed by the U.S. Department of Justice, reflecting the electric industry's recent concern with designing a framework for competition.
However, the policy also injects a fair amount of bureaucratic complexity into the mix, by requiring merger applicants (and protestants, apparently) to carry out a "screen analysis" (by resorting to computer programs) to study the potential effect of the merger on competition, including detailed study of various competitive factors, including, for instance, a step-by-step analysis of all possible sources of competitive generation and power supply in a geographic area served by merger applicants, and, for each and every source, an analysis of whether the resource offers a viable market alternative, based upon its inherent production costs, and the costs it must incur (transmission costs, including all possible paths and constraints) to deliver the product to the relevant market. Such analysis must present a comprehensive study of:
• relevant product and geographic markets,
• concentrations of company share in each market, with HHI indices,
• market prices,
• competing alternative generation costs (system lambda may be used as a proxy), and
• financial and technical constraints on product and market size (e.g., how transmission access effects importing of power supply alternatives into a given region, based upon prevailing transmission prices as defined in open-access tariffs filed in FERC order 888).
The "screen analysis" is based upon a "delivered price test" (em an assumption that alternative suppliers should be considered as part of any relevant product or geographic market if they are found able to deliver the product in
question to the customer at a cost no greater than 5 percent above the competitive price to the customer. (Here, the FERC notes that the DOJ Guidelines suggest a 5-percent price threshold, but acknowledge that other tests "may be appropriate.")
Once the number-crunching is done, and if market power is indicated, the FERC will still entertain analysis of whether the utility has or could mitigate market power, such as by transferring control of transmission facilities to an independent system operator.
In the end the FERC concludes that the usefulness of its screen analysis will depend on "the quality and comprehensiveness of the data filed with the application" (em