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M&A Uptick

Do regulatory and economic trends favor industry mergers?

Fortnightly Magazine - October 2010

action confirms that DOJ continues to follow the conceptual approach that DOJ utilized in the proposed (but failed) Exelon-PSE&G merger. In modeling the competitive effects of that proposed merger, DOJ input into its model the parties’ (and their affiliates’) financial hedging arrangements and other derivative transactions. DOJ’s analysis thus addressed whether these financial arrangements gave the merged entity an incentive or ability to raise prices that wouldn’t have been present taking into account only their physical generating assets. The lesson is that in assessing how a proposed transaction is likely to be reviewed by the antitrust enforcement authorities, the parties considering a merger should take into account their financial/trading arrangements.

Transmission Planning : On June 17, 2010, FERC issued its proposed transmission NOPR. 8 If adopted, the NOPR significantly would alter the manner in which transmission assets are planned and potentially constructed. A final rule that resembles the NOPR potentially would have very important ramifications for transmission-owning utilities, and several aspects of it could be significant to merger planning and merger approvals.

The NOPR proposes, inter alia , to: 1) require that transmission planning be done on a regional basis; 2) require procedures for coordinated planning between regions; 3) provide that transmission planning account for public policy requirements ( i.e., namely renewables requirements), established by state or federal law; and 4) remove from FERC-approved tariffs or agreements “a right of first refusal [created by those documents] . . . that provides an incumbent transmission provider with an undue advantage over non-incumbent transmission developers.” If this rule is adopted, it could have several impacts relevant to regulatory evaluation of new mergers. It could result in larger relevant geographic markets, either as a result of consolidation of ISOs or substantial increases in the capacity of transmission interconnections among regions. Also, mergers of large transmission companies in adjacent regions arguably could facilitate inter-regional planning. The new NOPR, by proposing to eliminate the right-of-first-refusal of incumbent transmission providers, arguably might affect the competitive dynamics of the transmission business. However, transmission will remain a highly regulated business, with transmission access governed by FERC, and with a very large number of firms able to attract capital sufficient to enter.

Combinations might make the combined companies more efficient in their planning and stronger financially, and thus better able to develop and construct new projects. Moreover, consolidations of transmitting companies across regions might provide a means for the state agencies responsible for regulating the merged entity to have a greater degree of input into the inter-regional planning process than otherwise would be the case in a post-NOPR world, where individual utilities and state regulatory commissions may have little influence in the regional and inter-regional planning processes. In any event, with billions of dollars projected to be spent on increased transmission capacity in virtually every area of the country, and with major new transmission infrastructure an important FERC policy objective, FERC’s adoption of the policies in the transmission NOPR and their perceived effect on the merging companies and their state regulators may be a significant factor, pro or con,