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Fortnightly Magazine - February 15 1997

merger announcements (em Naeve suggested that we might end up seeing a rash of gas-electric mergers simply because they might have an easier time winning FERC approval than a strictly horizontal deal between vertically integrated, investor-owned electrics. With the Securities and Exchange Commission relaxing its strict interpretation of the Public Utility Holding Company Act, Naeve saw the gas-electric merger as a convenient method to leverage the "value of incumbency."

Naeve, now a partner at Skadden Arps in New York City, put it this way: "An electric company may acquire a gas company without getting FERC approval if the electric takes over the gas by issuing securities an if the electric is bigger than the gas company. Very few antitrust issues will arise when electric and gas companies merge with each other."

Now, of course, we have the FERC's new policy statement in Order 592, which injects an antitrust inquiry into virtually any merger between vertically integrated electrics. But does Order 592 suggest that the FERC will question market power in a gas-electric merger?

"That's something we're looking into very carefully," said an unnamed Washington lawyer and former FERC staffer, when we met for breakfast recently. Said another lawyer at the meeting: "The FERC doesn't know what to do with mergers. So for the electric-only deals it holds 'em up, and for the gas-electric mergers it let's em' go through."

Wholesale Is No Choice

The other big news in the draft DOE bill is how the administration has apparently caved to pressure from low-cost enclaves by adding an escape clause giving states an option on customer choice. If a state prefers not to adopt retail choice, it can settle on wholesale access. In other words, Congress will guarantee a free and open wholesale market (em removing all impediments that might block or inhibit an electric utility from obtaining bulk power from any available resource (em but will acquiesce in the preference of any state in denying its own consumers the right to shop around among utilities, marketers, or any number of new variants of energy service company.

This is choice? Excuse me, but I don't get it.

When a car buyer compares Honda's Accord with Ford's Taurus, can you hear the buyer saying, "I'll get buy the Taurus, since Ford gets its steel from low-cost mills, whereas Honda is stuck buying from high-priced mills under long-term contracts,"? Or better yet, can you imagine teenagers choosing between Nike or Reebok according to where each company buys its nylon?

When you or I go shopping and compare competing consumer products, we look at the retail price; we examine the small differences that distinguish each product in function and appearance. Cost inputs are irrelevant. We automatically assume that each manufacturer has minimized its wholesale costs as much as possible. That's square one. That's where competition begins. The first thing the market does is soak up all the opportunities for arbitrage; all those differences in wholesale costs.

The idea that wholesale access will somehow benefit consumers rests on the forlorn assumption that the arbitrage opportunities that now