July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
FERC Approves Two Convergence Combos
The Federal Energy Regulatory Commission has approved the merger of Brooklyn Union Gas Co. and neighboring Long Island Lighting Co., although concerns emerged about potential vertical market power. A new holding company, temporarily called HoldCo, will run the merged corporation.
At the same July 16 meeting, FERC indirectly sanctioned the merger of Texas-based Valero Energy Corp. with PG&E Corp., the holding company (created Jan. 1, 1997) for California-based Pacific Gas & Electric Co.
LILCO + Brooklyn Union. The FERC found no horizontal market power concerns in the merger of natural gas distribution company Brooklyn Union with electric utility LILCO (Docket No. EC97-19-000). By the time the deal is complete, Brooklyn Union will not have ownership or control of generation.
Vertical market power concerns were identified, however, due to the combination of the intrastate gas operations of Brooklyn Union with the gas and electric operations of LILCO. The FERC said LILCO already possessed the incentive and the ability to discriminate against gas-fired generators, enabling LILCO to exercise market power in the downstream electric market. The question is whether the merger would increase the ability to engage in that behavior.
The FERC noted this merger was only the second it had reviewed with potential vertical market power. In each case, the merging entities owned or controlled significant resources in either upstream gas or downstream electric markets that are in close proximity.
The first case was the Enova and Pacific Enterprises merger. In that June 25 case, the FERC was concerned that the merged firm would have the incentive and the ability to raise rival generators' costs and consequently raise electric prices. The FERC concluded that imposition of regulatory safeguards best addressed its concerns, most of which were within jurisdiction of the state commission. The Commission noted, however, that this case presented different circumstances.
FERC said that after the merger, Brooklyn Union might find it profitable to provide discriminatory treatment to gas-fired generators that compete with those of its affiliate, LILCO. An analysis found that any potential discriminatory treatment of generators by Brooklyn Union is not likely to significantly affect prices in the relevant downstream market. Therefore, unlike in the Enova case, the FERC found no need to consider further regulatory safeguards.
Valero + PG&E. The FERC ruled that it lacked jurisdiction in the merger of Valero and PG&E, because the deal involved two holding companies (Docket Nos. EC97-22-000 and ER97-1847-000). The Commission's jurisdiction applied, however, to the transfer of control of Valero's power marketing affiliate, Valero Power Service Co., to PG&E. Also, FERC has jurisdiction over the indirect merger or consolidation of the jurisdictional facilities of the public utility subsidiaries of Valero and PG&E. Those facilities will merge along with the two holding companies.
The FERC found that because the two companies do not own or control generation in the same geographic markets and sell minimal electricity in the same areas, that horizontal market power is not a concern. Vertical market power also was not a problem, because Valero's pipeline facilities are all in Texas, and neither PG&E nor its affiliates own or control