Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

Fortnightly Magazine - January 15 1999

Bureau of Economics of the Federal Trade Commission. In the rulemaking process leading up to issuance of Order 888, both told the commission that structural reform, through 'operational unbundling' or ISOs, was necessary to achieve the commission's goals. Both warned the commission that behavioral remedies and standards and conduct would not be effective."

Bruce W. Radford is editor of Public Utilities Fortnightly.

The FERC Test: Blind to Arbitrage?Some see errors in the competitive screen.

The Problem. Assume two utilities merge in eastern Pennsylvania, within the PJM pool. Assume that cheaper resources can be found to the west, in ECAR, with little problem with transmission constraints. The FERC policy might have the applicants consider those resources in calculating pre- and post-merger market shares. But what if the ECAR plants sell instead in Ohio, where forced and planned outages pushed prices up?

Arbitrage. The FERC's so-called "delivered price test" ignores customer demand or whether sellers might find a better price elsewhere. It ignores opportunity costs, demand and arbitrage - some of the variables that make commodity markets dynamic.

"Simply Incorrect." In comments filed in the merger docket, the Southern Co. urges the FERC, when calculating market shares, to limit a supplier's capacity to the demand in the market. Southern notes that when competing for a sale of 50 MW, a seller with 1,000 MW to offer holds no greater competitive advantage than one selling 100 MW. Southern says the FERC "was simply incorrect" when it refused in the FirstEnergy case to make such an adjustment.

EEI's Answer. The Edison Electric Institute takes the lead in opposing the FERC's DPT method, instead recommending a model called the "Hypothetical Monopolist Test," derived directly from the FTC's 1984 Horizontal Merger Guidelines. For expert support, EEI called on Mark Frankena, senior vice president at Economists Inc., Washington, D.C., and the former deputy director for antitrust in the FTC's Bureau of Economics.

Ask the Question. Frankena argues that the FERC's DPT model (focusing on destination markets for products) can understate the geographic scope of competition. He infers that HMT does a better job of dealing with opportunity costs, customer demand, arbitrage and market dynamics. (Frankena also presented his model in testimony filed in the LG&E Energy Corp. merger case.)

EEI explains: "DPT assumes the seller can price discriminate in each of the target markets, while the HMT assumes that the seller cannot ¼ unless there are factors ¼ that may make discrimination possible." Thus, adds EEI, "DPT in effect starts with the answer and works backward, while the HMT starts with the question and works forward."

1 Comments, p. 6, filed Aug. 24, 1998 by Nat'l Rural Elec. Co-op. Asso., in FERC Docket RM98-4-000. Other groups filing significant comments include: Edison Electric Institute, American Public Power Association, Transmission Access Policy Study Group, National Association of Regulatory Utility Commissioners, National Association of State Utility Consumer Advocates, the consulting firm of Putnam, Hayes & Bartlett Inc., Wisconsin Electric Power Co., the Southern Co., Sempra Energy and public utility commissions in New York, Indiana, Ohio and Missouri.

2 Cudahy, Richard D., "The