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Monopoly Power After Reform? A Time for Soul-Searching

The Present Laws Are Unequipped
Fortnightly Magazine - May 1 2000

must yield price volatility and occasional high prices. Because no one retains an obligation to build power plants and sell power at regulated prices, the forces of supply and demand henceforth will govern how many power plants are built. Without occasional high hourly, weekly, or even monthly prices - much higher than we are used to seeing under regulation - there simply won't be enough capacity built to meet demand.

Of course, the mere presence of occasional high prices does not constitute socially harmful market power. And there are lots of good reasons why prices may rise for some customers some of the time under restructuring. Examples are changes in rate structures and pricing plans, the accelerated amortization of standard costs, and new costs like marketing and advertising by third parties.

 

Does Incentive Alone Threaten Competition?

Notes from the FERC's AEP merger case.

The Fox-Penner Testimony . In a case before the Federal Energy Regulatory Commission involving the proposed merger between American Electric Power Co. and Central and South West Corp., Peter Fox-Penner testified in April 1999 that a merger should raise competitive concerns if it increases an incentive to exercise market power that an applicant possessed prior to the merger:

Repudiation. In November 1999, in his initial decision, Administrative Law Judge Joseph R. Nacy rejected Fox-Penner's argument, describing his theory as "fanciful."

Redemption. On March 15, the FERC reversed the initial decision and ruled (with Commissioner Curt Hébert dissenting) that the AEP-CSW merger would enhance market power. The FERC OK'd the deal only upon condition that the two halves of the merged company would transfer operational control of their transmission facilities to a fully functioning, commission-approved regional transmission organization. Also, the FERC appeared to endorse Fox-Penner's ideas:

Yet without an adequate incentive to invest, competition cannot work. If we are going to let competition reign in electric markets, we cannot legislate away the occasional price jump without legislating away competition itself.

Instead, our notions of what constitutes "success" under restructuring may have to change, or else we may become our own worst enemy.

Enormous Discretion, But No Guidance

One problem not directly addressed in the DOE report is that no federal agency has a clear legislative mandate to draw the line between the positive, efficiency-enhancing role of occasional high prices and the harmful effects of markets that are too concentrated and prices that are only apparently "too high." Such an inquiry will require balancing the benefits of scale economies and vertical integration with competition, and will confront a host of new questions.

The antitrust laws award enormous discretion to the antitrust agencies, as does the public interest mandate to the FERC. However, economics and the law offer little to these agencies to help guide them in an open-ended inquiry into the proper degree of "competitiveness" in deregulated utility markets, or what to do to create it. Nor do these agencies feel they have a mandate from Congress to do all this - a problem made difficult by the overlap of state and federal regulation of the power industry.