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Score a Deal? 20-Odd Mergers in Search of a Policy
As utility takeovers break new ground, the FERC ponders proposed rules, perhaps already out of date.
A year ago, when U.S. Antitrust Czar Joel Klein talked of a "window of opportunity" for electric utility mergers, he didn't predict when it would close.
And it hasn't yet.
In the 12 months leading up to January 1998, when Klein had addressed the Federal Energy Regulatory Commission through its "Distinguished Speakers" series, only the ill-timed Primergy deal had been turned down. The next year, 1998, would prove no different. Even when a merger seemed to violate safe harbor rules, the commission would craft mitigation plans to let the deal go through. (See table, Ferc Filings: Approval Likely, with Shorter Delays.)
In the aftermath, some have decried the idea of "drive-by merger approvals."fn1 Others have argued that consolidation is inevitable - that deregulation will set off a search for a new equilibrium with higher market concentration.fn2 Klein, who has since moved on to pursue the Microsoft monopoly, wondered whether the FERC should go slow. "A moratorium," he said in his speech, would "postpone making difficult competitive evaluations for a brief period until we have developed a market-based history."fn3
The question today is whether the FERC can claim a policy that is both practical and adaptable. That inquiry grew more urgent as 1998 drew to a close, with the announcement in early December of two new merger deals that would break the mold: first, the takeover of PacifiCorp by Scottish Power PLC, and second, a merger of BEC Energy (parent of Boston Edison) and Commonwealth Energy System.fn4
In practice, the commission does have guidelines for merger approval, set out in late 1996 in a nonbinding statement of policy. In a process known as the "competitive screen" or the "Appendix A screen," the FERC studies whether the merger will stifle competition in bulk power by concentrating too much market share in one company's hands.fn5 It has now proposed to codify that policy in its regulations and extend it to vertical mergers between electric and gas companies, such as interstate pipelines.fn6
By September, the commission had collected comments on its proposed rules from utilities, regulators and trade groups. Many questioned whether the FERC policy is adaptable to a changing electric industry, with retail competition and a general sell-off of generating plants. They cited shortcomings with several of the FERC's ideas: 1) how to measure market power, especially in vertical mergers, 2) how to decide whether efforts at mitigation will be sufficient, and 3) whether the FERC should review retail competition in analyzing market power.
These concerns may now hold more urgency in light of the December announcements. The Scottish/PacifiCorp deal would run rings around the FERC policy, which focuses on the bulk power markets served in common by each merging company. The merger between BEC and Commonwealth might also beg a redefinition. After all, the Massachusetts restructuring plan encourages electric utilities to sell their nonnuclear generation by tying divestiture to the recovery of stranded costs. In fact, Boston Edison Co. had sold its fossil plants to Sithe Energies in