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Why Applicants Should Use Computer Stimulation Models to Comply With the FERC's New Merger Policy

Fortnightly Magazine - February 1 1997

a more detailed modeling of the transmission grid, that feature may not produce better results than obtained using simpler models.

For example, low-voltage lines not included in these models may limit transfer capabilities below the levels implicit in the models. In addition, these models currently do not include operating guides that allow transmission operators to increase transfer capability by opening lines, changing transformer and capacitor configurations, or dispatching plants out of merit order.

Finally, these models were not developed to analyze market power. Substantial development work in interactive solving and post-process programs would be necessary before these models would produce results that could form the basis for the market shares required by the FERC.

Other Model Uses:

Some Practical Examples

We expect that during the next twelve months participants in the electric power industry will make widespread use of computer simulation models, particularly the

dispatch/transportation models, in addressing market power issues at the FERC (em not only because of the new approach articulated in the FERC's statement on merger policy, but also because these models are useful in other contexts.

For example, computer simulation models should prove useful in making presentations on market power before the Justice Department, as the DOJ has already suggested their use in comments on the FERC's merger policy. %n2%n Many states are actively reviewing the competitive effects of mergers and industry restructuring proposals, offering still another forum for computer simulation models. Indeed, our own interest in these models has been driven by state proceedings.

Also, these models can be used for a number of purposes beyond analyzing the geographic scope of competition in computing market shares and concentration. For example, they may support or refute claimed instances of market power not detected by the FERC's analytic screen. The policy statement explicitly raises this possibility: That other evidence may show market power problems that the screen does not reveal.

In the case of any merger that does not pass the analytic screen, one should anticipate a detailed investigation of competitive effects. Well-designed models will naturally play a key role in those investigations. Specifically, computer simulation models will provide certain, albeit incomplete answers to the ultimate question under the Merger Guidelines: Will a particular merger create or enhance market power?

Properly constructed models provide information on the ability of one, two, or more utilities profitably to raise prices above competitive levels by reducing their outputs or sales of energy. These models have an inherent limitation, however. they cannot replace traditional antitrust analysis; instead, they can serve only as a supplement. Thus, while these models may demonstrate that one or more utilities might well possess the capacity to exercise market power by engaging in certain types of behavior (for example, acting as a dominant firm, or as noncooperating oligopolists %n3%n), the models do not deal (or do not deal well) with some other theories of anticompetitive behavior, such as collusion, for example. %n4%n

If a model cannot accommodate a particular type of anticompetitive behavior, it cannot demonstrate whether such behavior should pose a problem. Therefore, studies of market share and