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Mergers and the Public Interest: Saving the Savings for the Poorest Customers

Fortnightly Magazine - June 15 2000

inquiry in analyzing merger impacts involves a market definition. A delineation of markets is important to determine whether, and to what extent, impacts (positive or negative) will arise from a merger. The PUC must have a frame of reference within which to isolate and examine the anticipated effects of the proposed merger.

A market, simply defined, is an area within which sellers compete for the patronage of a common group of buyers. As this definition points out, the first two fundamental characteristics of "a market" thus require (1) a rivalry for the purchase decisions of buyers, and (2) a commonality amongst the sought-after buyers. CEAF/CC's presentation of facts in the PSCO case focused on the second element of the market definition.

"Ratepayers" do not represent a market. Instead, "ratepayers" consist of multiple markets. In the PSCO merger proceeding, CEAF/CC argued that low-income customers represent a distinct market for purposes of merger analysis, and identified factors that distinguished low-income residential customers as a separate market. In particular, the elasticity of demand distinguished low-income consumers. The definition of a market is frequently predicated upon the elasticity of consumer demand for the product in question.

The elasticity of demand measures the extent to which consumers can and will turn to substitutes if the price of a product increases. It considers the price sensitivity of the product in question as well. There can be no serious dispute that residential customers generally, and low-income customers in particular, have fewer alternatives, and lower price sensitivity, than large customers in the commercial and industrial (C&I) classes.

The elasticity of demand helps to define a market even within the monopoly situation of a distribution electric and natural gas utility. Low-income customers are less likely to switch fuels, because they are less likely to have dual fuel capabilities. They are less likely to reduce consumption. As a result, higher rates and lower levels of service can be imposed with less likelihood to the monopoly utility that consumers will respond by reducing their usage or moving to alternative fuels or fuel suppliers.

The "Passing On" Test: Rethinking Cost Allocation

Traditional merger analysis holds that efficiencies expected to result from a merger should be reviewed to determine the extent to which they are (1) merger-specific, and (2) likely to be passed on to consumers in the form of lower prices. CEAF/CC addressed the second half of this inquiry with respect to the proposed PSCO merger.

The passing-on requirement was first described formally by the Federal Trade Commission's 1984 decision in American Medical International (104 F.T.C. 1, 213-20 (1984)). The FTC found that "it is unlikely that market forces will oblige [AMI] to pass [cost-saving efficiencies] on to consumers." The passing-on requirement has been articulated time and again since.

In the PSCO proceeding, CEAF/CC identified two ways in which the passing-on requirement was not met. First, the merger itself created adverse impacts for the low-income market that more than offset benefits that were passed on. Second, the mechanism for distributing the merger-created benefits resulted in a disproportionately small share of benefits being provided to