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FERC Deals with Vertical Market Power in Mergers
In two separate cases, the Federal Energy Regulatory Commission for the first time has approved an analytical framework for examining vertical market power concerns raised by convergence mergers of gas and electric companies. This new framework applies when market power in one sector (such as natural gas) threatens competition in another (e.g., electricity).
In the first case, the FERC on June 25 conditionally approved the disposition of jurisdictional facilities in the proposed merger of two holding companies, Enova Corp. and Pacific Enterprises, the parent companies of San Diego Gas & Electric and Southern California Gas, respectively (Docket Nos. EC97-12-000 et al.).
On April 30, the FERC had ruled that while it does not have jurisdiction over mergers of public utility holding companies, it does have control over transfers of control - dispositions of public utility facilities that result from such mergers. That jurisdiction includes transfers of control of power marketer paper facilities, such as contracts, and physical facilities like transmission lines.
The second June 25 case involved the merger of two Houston-based companies - independent power developer, Destec Energy Inc., with NGC Corp., which the FERC approved. NGC engages in a wide range of energy-related businesses.
Commissioner William Massey encouraged FERC observers to study the Enova case. Massey observed that comity required the FERC to look to the California Public Utilities Commission to avoid duplicate cases and provide guidance. He said that if the PUC adopts mitigation measures, then "our wholesale concerns will be satisfied." That opinion was echoed by Chair James Hoecker, who pointed out that convergence mergers are vertical, and "this one especially requires cooperation between FERC and states."
Vertical Market Power Concerns. The proposed merger of Enova and Pacific Enterprises will create the nation's 22nd largest electric and gas combination utility holding company. If approved, the intrastate gas operations of SoCalGas would combine with the electric operations of SDG&E. But the FERC raised vertical market power concerns, noting that the potential existed for the merged entity to exercise market power that could adversely affect wholesale power markets. SoCalGas delivers natural gas not only to SDG&E's gas-fired generators, but to most gas-fired generators in Southern California that compete with SDG&E in the wholesale electric market.
The FERC said that while it believes most market power concerns could be eased, the most effective mitigation strategies lie within the jurisdiction of the California PUC. Therefore, FERC conditionally approved the disposition of facilities subject to adoption of certain mitigation remedies by the PUC. If the PUC's remedies do not satisfy the FERC, however, then it could revoke its merger approval.
The FERC noted that it crafted its Merger Policy Statement to apply primarily to horizontal mergers (see Order No. 592, Dec. 18, 1996). Vertical mergers, however, raise three types of competitive concerns that can result in higher prices or reduced output in the downstream output market: 1) denying rival firms access to inputs or raising their input costs; 2) increased anti-competitive coordination; and 3) regulatory evasion. The FERC decided to address the first two concerns, but left the third to the PUC.