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Primergy Merger Collapses Due to Delays

Fortnightly Magazine - July 1 1997

The proposed merger of Northern States Power Co. and Wisconsin Energy Corp. to form Primergy has been called off because of delays by regulatory authorities at both the federal and state levels.

"After thorough consideration, we have mutually agreed to terminate our plans," said Richard A. Abdoo, Wisconsin Energy chair, president and CEO. "The stockholders, customers and employees of both companies have waited too long and there is no certainty the matter will ever be decided by regulatory authorities."

Citing concerns over transmission constraints and resulting market power, the Federal Energy Regulatory Commission at its May 14 hearing voted to delay the proposed merger of Wisconsin Electric Power Co. and Northern States Power Co.

In April, the Minnesota Public Utilities Commission had decided to delay a decision regarding the merger due to allegations of improper contacts between Wisconsin PSC Commissioner Daniel Eastman and Abdoo. In early May, Daniel Eastman was cleared of any criminal wrongdoing involving the merger by Dane County District Attorney William Foust. A separate investigation still is pending by the Milwaukee County District Attorney's office.

In an initial decision, a FERC administrative law judge had found that the applicants had shown that the merger would not significantly affect competition in the nonfirm Wisconsin Upper Michigan System market. However, at its May hearing, the FERC disagreed and reversed the judge's findings. The FERC found that the judge's decision had been based on a nonstandard model run through a computer market simulation. Despite its findings, the FERC noted that it does not want to discourage development of computer models for use in merger analysis.

The FERC relies on the Horizontal Merger Guidelines developed by the Department of Justice and Federal Trade Commission, which uses the Herfindahl-Hirschman Index analysis to determine market concentration when analyzing proposed mergers. The FERC found that the post-merger HHIs for the market for delivered energy were well above 1800, and that the increases in HHI exceeded 100, which justified a presumption that the merger was likely to create or enhance market power.

At the hearing, the FERC had directed the merger partners to negotiate remedies to mitigate market power. For guidance it referred the two companies to its December 1996 merger policy statement in Order No. 592. The Commission said the companies could mitigate the market problems and sent the merger case to a settlement judge who had three months to report on settlement efforts. (See, FERC Opinion No. 413, Docket Nos. EC95-16-000, ER95-1357-000, ER95-1358-000, et al.)

According to Fitch Investors Service, withholding of merger approval could signal a new aggressiveness on the part of FERC to force generation divestiture as the price of large company mergers. If such a trend continues, Fitch warns it could alter the balance underpinning the many utility mergers announced during the past two years and those presently under consideration.


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