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

Fortnightly Magazine - June 15 2000

"residential" benefits will be distributed to the high-use C&I customers.

The same is true within a ratepayer class as well. If residential savings (such as customer service savings) are produced on the basis of numbers of customers, and those savings are distributed on the basis of units of energy consumption, then there will be a disproportionate distribution of benefits to high-use residential customers and away from low-use residential customers. That will disproportionately harm low-income consumers, according to CEAF/CC.

CEAF/CC cited the Residential Energy Consumption Survey (RECS) prepared by the DOE's Energy Information Administration in support of its conclusion that low-income customers use less energy on a per household basis than do average residential customers. The RECS reports that for the Mountain Census Division of the Western Census Region - this is, the census division of which Colorado is a part - energy consumption by low-income households is less than that for the average household. Though the average annual energy consumption for all households in the Mountain Census Division is 98.1 million British thermal units, the consumption for households with incomes at or below 150 percent of the federal poverty level is only 78.6 mmBtu.

Using this data, CEAF/CC found that if merger-generated benefits are distributed on the basis of usage rather than number of customers, low-income customers will "lose" roughly $90 of every $1,000 in savings. At this rate of misallocation, roughly $8.7 million of merger savings that should have accrued to PSCO's low-income customers instead would accrue to other customers.

The Settlement: Borrowing from Telecom Deals

In response to the merger-induced harms to low-income consumers it had identified, CEAF/CC recommended that PSCO enter into a Community Energy Partnership. CEAF/CC emphasized that funding for the Partnership would not come out of ratepayer pockets, but instead would be taken out of projected merger savings. The Partnership was proposed as a mechanism for distributing projected merger savings to low-income consumers who otherwise would be denied their fair share. But the Partnership was more than a sharing mechanism for merger savings, however. It also had been structured to redress the affirmative harms that were projected to arise as a direct result of the merger. A variant of the CEP ultimately resulted in the PSCO settlement agreement.

The settlement between PSCO and CEAF/CC was not an unprecedented response to the types of merger-induced problems CEAF/CC identified with respect to low-income consumers. Programmatic remedies are common responses to adverse impacts for particular markets as a result of a merger. CEAF/CC cited the recent merger of Butterworth Health Corp. with Blodgett Memorial Medical Center in Michigan as a similar situation. In that proposed merger, the principal claim of "efficiency savings" involved claims of "capital avoidance." Concerns were raised, however, that the capital avoidance really involved excluding the offer of products and services that consumers otherwise would demand from an unmerged hospital.

In response to these concerns, the federal court hearing the case required the hospitals to implement a "Community Commitment" plan as a condition of the merger. The Community Commitment included, amongst other things (1) a freeze on