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Score a Deal? 20-Odd Mergers in Search of a Policy

Fortnightly Magazine - January 15 1999

all market power is objectionable. Howard W. Pfifer, chairman of Putnam, Hayes & Bartlett, explained the paradox in his testimony on market power concentration in the APS/DQE merger case:

"The issue is not whether a particular market is highly concentrated prior to the merger, but how a particular merger will affect competition in that market."

And even if a merger does produce a significant increase in concentration, the parties may find a way out through mitigation plans. In the merger case involving Enova and Pacific Enterprises, evidence showed that Southern California Gas Co. delivered natural gas to 60 percent of the generating capacity that generally was available to supply electricity in the Southern California market. It would serve gas to at least 30 percent of such generating resources even assuming maximum power imports into the area. Contrary to the gas/electric mergers noted above, the FERC ruled that SoCalGas exerted a "significant presence" in the market. Moreover, with California having restructured its electric market to include a power exchange, the FERC anticipated that gas-fired generation would set the power price - and "SoCalGas controls gas deliveries to almost all such generation," said the FERC, creating "the potential for higher wholesale electricity prices."

Nevertheless, despite all this evidence of market power, the Enova/PE merger won approval, conditioned on mitigation remedies.fn11

Retail Impacts:

"Ducking" the Issue?

If the FERC review process elicits a common complaint, it's that witnesses must speculate in calculating market shares and totals for changes in the Herfindahl-Hirschman Index, the indicator of market concentration.

Witnesses must run a separate test for each market and each eventuality. Will an ISO form? Which utilities will join the ISO? How will the group design a transmission tariff? Will all other third-party mergers close? Should FERC treat pending mergers or proposed plant divestitures as already completed in analyzing market share?

Similar issues arise with the prospect of retail competition. If a state approves retail choice for consumers, utilities will require less generation reserved to serve captive, or native load, customers. This reduction in native load reservations will free up more capacity as available, changing market share. Should the FERC speculate on the likelihood of retail choice in a state in which the merged company plans to operate?

In the Constellation merger case, a staff member of the FERC's Office of Economic Policy had submitted testimony on market shares based on economic capacity. The witness, David Patton, assumed that retail choice was coming in Maryland, freeing utility generating capacity otherwise dedicated to native load. That assumption produced greater market shares for Potomac Electric Power Co. and Baltimore Gas & Electric. As a result, Patton saw the merger as anticompetitive.

Patton's reliance on "economic capacity" instead of "available economic capacity" violated the FERC guidelines. In fact, the merger applicants introduced testimony by professor Paul Joskow, of MIT, to rebut Patton's claims. As Joskow argued, "Mr. Patton has not applied the [merger guidelines] properly ¼ He has failed to ¼ take into account the fact that the lowest-cost generating capacity is dedicated to serve retail customers at regulated rates."