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FERC's Merger Policy: Still Founded on Market Power

But the fly in the ointment is computer modeling, where no one yet agrees on how to mirror the real world.
Fortnightly Magazine - January 1 2001

3

In performing a CAS, the applicants must define relevant product and geographic markets. Order 642 retains as relevant products non-firm energy, short-term capacity (or firm energy), and long-term capacity. Perhaps sensitized by California-related concerns that the real-time market can be a focus of potential anticompetitive activity, 4 Order 642 adds spinning and non-spinning reserves and imbalance energy as new products for CAS evaluation.

For defining the geographic market, Order 642 retains the delivered-price test, which includes suppliers in a destination market if they can physically reach the market and if their price is no more than 5 percent above the pre-merger market price. Applicants also are required to provide "sensitivity analyses," at least some of which would assume the completion of announced but not consummated mergers.

The rule also requires merger applicants to submit extensive market and transmission capacity data, including data on firm transmission rights and transmission congestion contracts, in order to assure the proper identification of all relevant destination markets and all the electric supply with physical or financial access to those markets. The FERC presumes in the new regulations that capability on transmission interfaces that become internal to a merged firm will be unavailable to alternate suppliers unless (1) the merged company lacks generating capacity to use the interface capability, (2) applicants commit to making some interface capability available, or (3) alternate suppliers have purchased the capability long-term.

The rule also reaffirms reliance on the Herfindahl-Hirschman Index (HHI) statistic for identifying those horizontal mergers that have major competitive impacts. The HHI statistic is derived for each destination market by summing the squares of the percentage shares of the market participants pre- and post-merger to determine (1) the degree of concentration in the destination market, and (2) the merger-related increase in market concentration. The increase in the HHI relative to the degree of market concentration determines whether a merger raises anticompetitive concerns.

Policy by Bean Counting
Are computers the answer?

As the FERC developed its merger rule, it asked the industry how it might use computer models to simulate the dynamic complexity of wholesale power markets. That might allow the FERC to look beyond narrow geographic areas, to capture the effects of arbitrage.

And while the comments appeared largely favorable on the use of computers, doubts still emerged, prompting the commission to postpone the question to a technical conference "at some future date."

  • Tracking the Market

    "The [FERC] fails to allow for arbitraging. ... [F]ocusing only on particular destination markets ... ignores the reality that other neighboring markets may have alternative supplies that could help limit profitability ... thus constraining the exercise of market power." -

  • Try Using Computers

    "FERC may wish to take advantage of advances in computer simulation modeling techniques to examine more alternative scenarios ... We expect that more flexible, reliable, and accurate models will be developed and might soon be commercially available. ..." -

  • But Do It Right

    "[T]he main advantage of models of the type proposed by the commission is that they simulate the interaction among all loads and resources, resulting in power flows