When economic reformers in the old Soviet Union searched for a metaphor to describe their move to a market economy, they a spoke of a horseman jumping a ditch. The true test of a strategy was that...
Shaky merger policy finds the FERC at war with itself.
"IN HIS DELIGHTFUL ARTICLE, "THE FOLKLORE OF Deregulation," published this summer in the Yale Journal on Regulation, federal judge Richard Cudahy notes the ethereal nature of "virtual electricity." This new product, he explains,"exists only as a blip on a computer screen and will never give one a shock." "Reality," he notes, has "retreated to the money part of the system."
We could use a dose of that reality in looking at electric utility mergers.
Over the Veteran's Day holiday, I found time to read some 650 pages of regulatory policy and industry comments on electric utility mergers filed this past spring and summer at the Federal Energy Regulatory Commission (see Docket No. RM98-4-000). The FERC wants to codify the nonbinding policy statement it issued in 1996 in Order 592, and extend that policy to vertical mergers.
Back when Alfred Kahn convinced the federal government to deregulate the rates charged by the nation's passenger airlines, no one correctly anticipated how the new business would operate (em the hub-and-spoke model, fares fluctuating at a whim.
That's the challenge for the FERC. How can it sift the "good" mergers from the "bad" when no one can predict what utilities will look like in just a few years? The FERC wants to avoid putting too much electric generation in the hands of a single firm that also controls access to transmission or "inputs" (such as natural gas) that play a significant role in electricity production. But why should that be necessary now? After all, the FERC presumably ensured open access to transmission in Orders 888 and 889. Natural gas pipelines and local distribution companies remain largely regulated. The FERC rules should make it impossible to use control of gas assets to leverage market power in electric generation.
To complicate matters, utilities are divesting generating capacity, becoming "wires companies," where size might be desirable. Market power may end up with retail aggregators, wielding a controlling share of energy purchases in retail markets. But the FERC says it won't examine that, even if effects seem severe (as in the defunct Constellation merger), or even if state regulators ask for help, as shown in the Nov. 10 ruling that set a hearing on the pending merger between American Electric Power Co. and Central and Southwest Corp.
At its core, the FERC's electric utility merger policy admits a failure of regulation. Robert Bork said it all in the title of his 1978 book, The Antitrust Paradox: A Policy at War With Itself.
IN ITS NOTICE OF PROPOSED RULEMAKING, issued on April 16, the FERC proposed to codify the analytic screen described in Order 592 for horizontal mergers and carry it over to vertical mergers. That proposal attracted convincing opposition on various ideas from all over the electric industry. The most revealing comments came from the Edison Electric Institute; the American Public Power Association (joined by the Transmission Access Policy Study Group); The Southern Company; Sempra Energy; state regulators from New York, Missouri, and Ohio; the National Rural Electric Cooperative Association;