In thinking about transmission pricing for a competitive electric industry, we should remember that the fundamental objective of competition is to increase economic efficiency. Improved economic...
the Electric Consumers Resource Council (joined by the American Iron and Steel Institute and the Chemical Manufacturers Association); and the consulting firm of Putnam Hayes & Bartlett.
The FERC policy would identify the pre-merger market shares in electric generation products in wholesale markets and compare them with market shares predicted after the merger. It would focus on the predicted change in HHI figures (Herfindahl-Hirschman Index), by estimating how much product could be supplied economically by other suppliers. It would consider limitations of geography, variable costs, transmission constraints, and native-load reservations. For vertical mergers, any generating plants owned by a company supplying inputs (such as natural gas, for gas-fired plants) would be deemed as owned in common by the input supplier.
Thus, for any market, the FERC would track all sellers that might conceivably be involved. But it would ignore the level of buyer demand, as well as whether the suppliers might do better by selling their generation in different locations at a higher price.
Comments from EEI attacked the FERC's "delivered price test." EEI offered analysis from economist Mark Frankena, now senior v.p. of Economists Inc., of Washington, D.C., and a former deputy director for antitrust in the Bureau of Economics at the Federal Trade Commission. The consulting firm Putnam Hayes & Bartlett essentially agreed, describing the FERC's effort as a "need to put names on electrons."
MANY ISSUES APPEAR PROBLEMATIC. They indict not only the merger policy, but the FERC's underlying theory of functional unbundling without any forced divestiture of generation from transmission. Here are the most convincing critiques:
• Opportunity Costs. EEI, Southern, APPA/TAPS, and PHB discredit the FERC's DPT method, which ignores arbitrage and gridwide opportunity costs. NY PSC says concentration of generation may have benefit (em that transmission regulation won't dispel all monopoly power.
• Retail Impacts. ELCON, state regulators, see blurring of wholesale retail markets. NRECA says retail issue will go unexamined, since states won't admit a lack of authority (em the sine qua non for FERC review.
• Other Pending Mergers. Should HHI figures treat other pending mergers as fact? If not, notes NY PSC, initial analysis would be "meaningless" if other deals occur by the time case ends.
• Vertical Mergers. PHB, EEI, see little threat, since gas/electric mergers simply "realign sales patterns," and make boost efficiency.
• Confidentiality. PHB, EEI, see advantages to Hart-Scott-Rodino procedure, where market data stays confidential. EEI offers study by Mike Naeve suggesting FERC wants to conduct study in the open (with assistance from intervenors) to cover for its lack of manpower. APPA/TAPS predicts merger applicants will give the "run-around" to the FERC, rather than divulge data.
• Structural Separation. Sempra Energy offers an easier path: Dispense with all data collection and market share calculation. It can't be done in a changing industry. Instead, approve merger only if applicants divest all generation and form an independent system operator.
Putnam, Hayes and Barlett raises another troubling point. It notes that since most mergers will fail the objective analytic screen, the decision will hinge on subjective factors, such as how the FERC treats efforts at mitigating market power.