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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
  • that arbitrage between markets. ... However, the [FERC] proposes to zero out all loads except the destination market load. ... This destroys the power of the model." -

  • Better Yet, Forget It

    "These markets do not suffer easily the approximations that were so useful and convenient in regulated markets. ... [W]e are not aware of the existence of any model that is generally recognized to be competent. ..." -

-B.W.R.

However, noting that the CAS is conservative, the order's preamble states that the mere presence of CAS violations (i.e., HHI increases above acceptable levels) will not necessarily cause rejection of a merger or require mitigation measures in order to gain merger approval. According to the preamble, market conditions (e.g., demand and supply elasticity), ease of entry and market rules, and technical conditions (such as types of generation involved) each can cast light on whether a particular merger may harm competition. As an illustration, the preamble cites the recent ComEd/PECO decision. 5 FERC there determined that the base load characteristics of the applicants' nuclear generation, which produced a significant HHI increase, prevented its use as part of a capacity-withholding strategy to exercise market power. In two other recent cases, NSP/New Century and CP&L/Florida Progress, FERC similarly found that the CAS violations were not the kind indicating that the merged companies could exercise horizontal market power. 6

The order's preamble provides helpful commentary on the treatment of power sale contracts in CAS analysis. FERC's view had been that capacity sold under contracts for a year or longer should be classified as the purchaser's capacity and part of the purchaser's market share. However, recognizing that control over unit output is essential to implementing an anticompetitive scheme, the preamble emphasizes the need to determine whether the seller or the purchaser has actual control over the operation of the unit from which the capacity is sold.

Order 642 also requires applicants to include with the merger filing any mitigation remedies that may be appropriate. FERC distinguishes between behavioral remedies (e.g., according transmission priority to certain customer classes) and structural remedies (e.g., divestiture). The preamble does not say, but does imply, that a behavioral remedy may suffice if the competitive concerns raised by the CAS appear to be short-lived in nature. Conversely, longer-term problems may require structural remedies.

The preamble's helpful commentary on the treatment of power sale contracts suggests that a temporary sale of capacity, coupled with an effective mechanism to divest the seller of control over the operation of the unit, will constitute satisfactory mitigation, particularly where the FERC expects the period of competitive concern to be short-lived. FERC praises commitments to join RTOs as a pro-competitive means for mitigating merger-related market power increases.

Vertical Deals: Looking Upstream

Order 642 establishes the filing requirements for vertical mergers, chiefly between gas and electric companies, that may foster market power at an "upstream" level (e.g., gas as boiler fuel for electric generators) which enables a firm to charge anticompetitive prices in a second "downstream" market (e.g., electric generation). And while the rule reiterates many of the requirements for