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Perspective

Some want a tighter grip on generators, but FERC should steer clear.
Fortnightly Magazine - October 1 2001

also was suggested that the commission consider replacing the hub-and-spoke analysis with the Appendix A screen already used for analyzing market power in merger cases.

The commission and the industry already are familiar with the Appendix A screen, which is set out in FERC's merger policy statement in Order No. 592. The Appendix A screen provides a much more refined look at the factors that shape geographic and product markets than does the hub-and-spoke test. And using the Appendix A screen would allow the commission to shift its focus from individual market participants to wider conditions present in the overall market. Yet the Appendix A screen could also tax administrative resources. And it raises substantive issues as well.

First, many have contended from the start that the focus on the analysis of individual destination markets in Appendix A tends to produce an analysis that is too narrow and that naturally yeilds to high concentration numbers. 8 The commission has never really addressed the substance of this criticism.

Second, while Appendix A is based on the horizontal merger guidelines issued by the Federal Trade Commission and Department of Justice, FERC has applied the concentration numbers resulting from the HHI analysis (Hirschman-Herfendah Index) in a way that differs significantly from how the antitrust agencies apply such numbers. For example, DOJ and FTC use the HHI numbers purely as a screen, or a trip wire, for determining whether the merger warrants greater scrutiny. At FERC, however, the HHI screens have become more akin to hard and fast walls through which a merger cannot proceed if the increase in market concentration exceeds the pre-set limits. 9

Third, how would Appendix A apply in the context of MBRs? In the merger context, FERC uses Appendix A to analyze that change in market concentration attributable to the merger. In the case of MBR authority, there is no change in concentration. What would be the threshold for determining that the commission either must deny MBR authority or else prescribe market power mitigation measures as a condition for MBR authority?

In the merger context, the FERC has said that an HHI above 1800 gives cause for concern. A score of 1800 implies six equal-sized sellers. But that standard might prove too stringent for the industry as a whole in the context of market-based pricing. In the general economy, many consumer product markets would show much higher HHI levels-yet no one sees a need for regulation.

Massey Offers Other Ideas

In addition to analyzing market concentration, Massey suggested that the commission focus on market structure and, in particular, the criteria that might be indicative of whether a market could support workable competition among generators. In his dissenting opinion, Massey described "some of those elements" that might be looked at as leading indicators. Each of these criteria deserves careful consideration. Some raise fundamental questions about market design. Others may push FERC beyond its jurisdiction.

Generating Capacity Adequate? This question is valid, but one cannot reasonably suggest that the problem will be remedied by denying authority for market-based pricing. Instead, denying MBR authority