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

Fortnightly Magazine - January 15 1999

combined share in any relevant market.

"The merger," they note, "satisfies all Appendix A HHI safe harbor criteria ¼ in nearly all destination markets."

AEP operates in seven states: Ohio, Indiana, Kentucky, Michigan, Tennessee, Virginia and West Virginia. CSW's four subsidiaries operate in Texas, Oklahoma, Arkansas and Louisiana. The two systems do not touch. However, in the most controversial aspect of the deal, AEP and CSW say they will reserve a contract path of 250 MW of transmission capacity on 345-kilovolt lines running from AEP's interface with Ameren to a second interface between Ameren and CSW (Public Service Co. of Colorado). This line, similar in idea to the link planned between PSC of Colorado and Southwestern Public Service Co. (which proved critical to the FERC's OK of the New Century Energies merger), would allow AEP and CSW to integrate their operations as a combined system and ISO. However, the 250-MW reservation would increase AEP's market power in CSW destination markets. To compensate, AEP would sell off 320 MW into the Southwest Power Pool and the Electric Reliability Council of Texas. AEP would offer a sales price of the lesser of $14 per megawatt-hour or the variable cost of CSW's SPP companies, but could recall the sale by paying $60 per MWh.

The new AEP ISO would operate coincident with the boundaries of the new merged company. It would take responsibility for transmission planning but would not carry out central dispatch. Until the new AEP ISO could set up a single system-wide transmission tariff, the merged company would introduce a two-zone pricing scheme for transmission. This scheme would echo key differences in the transmission systems of the two merger partners. AEP operates 2,000 miles of 765-kV lines. It has made greater use of such extra-high-voltage lines than any other U.S. utility, imposing high costs on its transmission system. By contrast, CSW operates a cheaper, though still unique transmission regime. Its four operating subsidiaries lie both in ERCOT and the SPP, tied only by asynchronous DC lines. As the applicants testified, the proposed two-zone tariff reflects their different cost structures: the west zone comprising the existing CSW system and the east zone the AEP system. "The principal reason," they add, "is avoidance of repeated rate shocks to transmission customers."

Shocking or not, the application has elicited a raft of protests, many filed at the end of June, right after the worst of last summer's Midwest price spikes.

Some of the complaints carry an emotional charge. The American Electric Group, representing municipal utilities in Ohio, Texas, Indiana, Louisiana and Oklahoma, accuses AEP and CSW of "a long history of anticompetitive or monopolizing activities, discriminating behavior and broken promises." Other complaints focus directly on the merger review process.

The CSW Customer Group, representing rural co-ops in Texas, Oklahoma and Arkansas, says the merger could harm competition in the Southwest Power Pool. It attacks the market power analysis offered by Hieronymus of Putnam Hayes & Bartlett. It accuses Hieronymus of understating both available transmission capacity and the competitive power price in the CSW-SPP market, thus understating AEP's