As utility takeovers break new ground, the FERC ponders proposed rules, perhaps already out of date.

A year ago, when U.S. Antitrust Czar Joel Klein talked of a "window of opportunity" for electric utility mergers, he didn't predict when it would close.

And it hasn't yet.

In the 12 months leading up to January 1998, when Klein had addressed the Federal Energy Regulatory Commission through its "Distinguished Speakers" series, only the ill-timed Primergy deal had been turned down. The next year, 1998, would prove no different. Even when a merger seemed to violate safe harbor rules, the commission would craft mitigation plans to let the deal go through. (See table, Ferc Filings: Approval Likely, with Shorter Delays.)

In the aftermath, some have decried the idea of "drive-by merger approvals."fn1 Others have argued that consolidation is inevitable - that deregulation will set off a search for a new equilibrium with higher market concentration.fn2 Klein, who has since moved on to pursue the Microsoft monopoly, wondered whether the FERC should go slow. "A moratorium," he said in his speech, would "postpone making difficult competitive evaluations for a brief period until we have developed a market-based history."fn3

The question today is whether the FERC can claim a policy that is both practical and adaptable. That inquiry grew more urgent as 1998 drew to a close, with the announcement in early December of two new merger deals that would break the mold: first, the takeover of PacifiCorp by Scottish Power PLC, and second, a merger of BEC Energy (parent of Boston Edison) and Commonwealth Energy System.fn4

In practice, the commission does have guidelines for merger approval, set out in late 1996 in a nonbinding statement of policy. In a process known as the "competitive screen" or the "Appendix A screen," the FERC studies whether the merger will stifle competition in bulk power by concentrating too much market share in one company's hands.fn5 It has now proposed to codify that policy in its regulations and extend it to vertical mergers between electric and gas companies, such as interstate pipelines.fn6

By September, the commission had collected comments on its proposed rules from utilities, regulators and trade groups. Many questioned whether the FERC policy is adaptable to a changing electric industry, with retail competition and a general sell-off of generating plants. They cited shortcomings with several of the FERC's ideas: 1) how to measure market power, especially in vertical mergers, 2) how to decide whether efforts at mitigation will be sufficient, and 3) whether the FERC should review retail competition in analyzing market power.

These concerns may now hold more urgency in light of the December announcements. The Scottish/PacifiCorp deal would run rings around the FERC policy, which focuses on the bulk power markets served in common by each merging company. The merger between BEC and Commonwealth might also beg a redefinition. After all, the Massachusetts restructuring plan encourages electric utilities to sell their nonnuclear generation by tying divestiture to the recovery of stranded costs. In fact, Boston Edison Co. had sold its fossil plants to Sithe Energies in mid-May. It planned to close on its sale of the Pilgrim nuclear station to Entergy by early 1999. And, according to spokesman Peter Dimond, Commonwealth Energy was expected to close by about Christmas on its sale to Southern Energy of some 984 megawatts in nonnuclear generating resources, Canal unit 1 (oil-fired), its 50 percent interest in Canal unit 2 (oil/gas), Wyman unit 4 (oil), five diesel generators on Martha's Vineyard and interests in 16 purchased power contracts.

When asked, Dimond confirmed that the sale would make Commonwealth Energy a "wires-only" company. What does that mean for FERC merger policy?

Consolidation:

Consumer Benefits?

According to the New York Public Service Commission, utility mergers can produce efficiencies "which redound to the benefit of consumers." In a recent order setting up a process to auction off generating plants for Consolidated Edison, the PSC endorsed merger guidelines that take a somewhat benign view toward a large market share:

"We recognize the potential efficiencies inherent in single ownership of multiple generation stations."

The PSC urged a balance between concern over undue market power and the benefits to ratepayers accruing from large-scale ownership, both through "higher auction prices and lower generation production costs."fn7

In comments filed in August in the FERC rulemaking docket, Edison Electric Institute also urged a relaxed view toward industry consolidation:

"As a significant number of companies will have divested some or all of their generation assets, mergers of transcos or 'wires' businesses may come before the Commission. Mergers of wires companies, which will remain subject to price and access regulation, should raise virtually no significant market power problems and indeed should be viewed positively."

Sempra Energy would make merger review easy. Forget generation capacity, forget market share, says Sempra, in comments filed with the FERC. Just approve any and all mergers in which the parties will have divested all generation and entrusted their transmission lines to an independent system operator or institution similar to an ISO.

Speaking last year at an electric industry forum held in San Diego, former state regulator Charles J. Ciccheti implied that the FERC was on the wrong track. "Mergers," he suggested, "are about gaining customers. They are not about gaining market share in the generation segment." Ciccheti then added, "This is ironic because the FERC attempts to assess the latter and virtually ignores the former."

Whether or not the FERC has it right, the cases often turn on individualized "hold-harmless" plans proposed by the parties or the commission staff to mitigate any undue market power. This fact makes the process more subjective, as noted in comments from William Hieronymus, managing director for the consulting firm Putnam, Hayes & Bartlett Inc., and Walter Woelfle, director of legal services for Wisconsin Electric Power Co. They identify a troublesome tradeoff between standardization and flexibility.

"Applicants," they note, "have a single 'bite at the apple.'" Without concrete guidelines, "they face second-guessing by intervenors or commission staff." Indeed, say Hieronymus and Woelfle, "if the staff were to use an alternative interpretation ¼ applicants are unlikely even to know about it until the commission issues its decision on the merger."

This danger is compounded because the FERC assembles market power data through a quasi-judicial public process, rather than by an informal confidential process, as at the Federal Trade Commission under the Hart-Scott-Rodino Act Antitrust Improvement Act of 1976. Former commissioner and now private attorney Mike Naeve, commenting for the Edison Electric Institute,fn8, explains: "FERC is under no obligation to protect the confidentiality or privilege of materials it collects when evaluating a merger." He adds, "Indeed, with limited staff resources ¼ FERC is motivated to disseminate [information] broadly ¼ so that utility customers can assist [it] in testing the veracity or comprehensiveness of the data."

Others concur. "The FERC is getting only a small part of the picture that is typically available to the Hart-Scott-Rodino agencies, and is setting up the intervenors to fail in their opposition," say the American Public Power Association and the Transmission Access Policy Study Group. "[The] FERC staff itself will have to shoulder the burden."

As PHB and WEPCO conclude, this marriage of public access and ex parte restrictions leads to a curious pass: "Neither applicants nor intervenors have any window into the staff's deliberations or ¼ analysis."

That comment ties up the full range of opinion: from "window of opportunity" to no window at all.

Market Power:

Can Any Deal Fail?

Except for speculation about retail competition and whether market share calculations should recognize generation devoted to native load (see next section), little constructive debate has emerged concerning the FERC's Appendix A screen, used to measure pre- and post-merger market shares and gauge anticompetitive effects. And that includes vertical gas/electric mergers, such as Enron/PGE, Duke/PanEnergy and Houston/NorAm, which seem to have encountered less trouble gaining approval than have the more traditional deals between two or more electric utilities. Moreover, a look at stock prices indicates that Wall Street favors the vertical deals over the horizontal (see table, Vertical Mergers: Wall Street's Favorite?).

Instead, the action has focused more on how to craft the so-called hold-harmless plans and other strategies aimed at mitigating anticompetitive effects for those mergers that fail the screen.

Consider the Allegheny/DQE merger, for example. It failed, apparently, when DQE balked at mitigation conditions forcing it to sell the Cheswick generating plant (and perhaps as much as 2,500 MW in total). The sale would minimize market share held by the post-merger company should the Midwest ISO eventually fail to develop a transmission tariff to minimize rate pancaking to a degree sufficient to open the market in western Pennsylvania to power imports from more distant sources.

DQE claimed it wouldn't object to selling the plant as much as it loathed uncertainty. It said the forced sale - if and when required - might simply take too long, exposing the company to open-ended risk and a loss of leverage with would-be plant buyers if the merger closing date should draw near with the divestiture deals still pending. (Note: DQE had announced in late September that the merger was dead, but on Dec. 16, FERC judge Bruce Birchman gave Allegheny until Jan. 15 to make a further status report on its attempts to obtain a temporary restraining order, or to show cause why the merger is not dead.)

In many cases, interpreting the Appendix A screen has sometimes proved a no-brainer.

At least two horizontal mergers (WEC/ESELCO and WPS/UP) were approved without hearings where one of the parties (Edison Sault Electric and Upper Peninsula Energy, respectively), had no "available economic capacity,"fn9 and thus no additional market share to bring to the deal. In the Conectiv case, the merged company was projected to have no "uncommitted capacity"fn10 for the first four years following the merger. Moreover, though Delmarva Power & Light had gas operations, it didn't sell gas to any gas-fired generating plants owned by Atlantic City Electric, its merger partner.

Two vertical mergers won favor (PG&E/ Valero and KeySpan) where at least one of the parties owned no generation at all. Similarly, in several of the vertical mergers, the parties showed that the gas pipelines owned by one party did not sell gas to any electric generators that competed in the same sales markets served by the electric utility partner.

The FERC rule even excuses merger applicants from filing a competitive screen analysis where the merging firms do not have facilities or sell relevant products in common geographic markets.

As the FERC explained in the PG&E/Valero case, Valero's pipelines generally ran from West Texas to East and South Texas. Said the commission, "It is highly unlikely that any electric generation in Texas is currently in competition with any of the generating resources affiliated with PG&E."

Purchased power contracts can add to market share, but the rule seems mixed. In the Conectiv case, the FERC said it would treat generating resources sold to utilities by nonutility generators as controlled by the purchasing utility, thus adding to potential utility market power. In the Houston/NorAm case, however, which fell under FERC jurisdiction because a NorAm affiliate (NorAm Energy Services) was a power marketer, the commission allowed the affiliate to show that it did not control generation represented by its purchased power contracts. Thus, the contracts did not count as market share in the Appendix A screen.

At times the FERC has appeared to interpret the screen in a manner helpful to merger applicants. In the KeySpan case, the evidence showed that Long Island Lighting Co. and Brooklyn Union Gas Co. together controlled 47 percent of the aggregate natural gas pipeline capacity into Long Island. Would that control cast a chilling effect on efforts by others to construct new gas-fired generation on Long Island, to break into the market? The FERC effectively said no. It saw no negative impact because the evidence showed that the competitors had little chance or incentive to build new generating plants in western Long Island.

As the FERC explained, "[T]he Brooklyn Union service area is a densely populated urban area with few, if any, available sites for generating units ¼ [H]igh construction costs and environmental concerns [also] reduce the likelihood of additional generation being sited in BUG's service area."

Therein lies the irony. Not all market power is objectionable. Howard W. Pfifer, chairman of Putnam, Hayes & Bartlett, explained the paradox in his testimony on market power concentration in the APS/DQE merger case:

"The issue is not whether a particular market is highly concentrated prior to the merger, but how a particular merger will affect competition in that market."

And even if a merger does produce a significant increase in concentration, the parties may find a way out through mitigation plans. In the merger case involving Enova and Pacific Enterprises, evidence showed that Southern California Gas Co. delivered natural gas to 60 percent of the generating capacity that generally was available to supply electricity in the Southern California market. It would serve gas to at least 30 percent of such generating resources even assuming maximum power imports into the area. Contrary to the gas/electric mergers noted above, the FERC ruled that SoCalGas exerted a "significant presence" in the market. Moreover, with California having restructured its electric market to include a power exchange, the FERC anticipated that gas-fired generation would set the power price - and "SoCalGas controls gas deliveries to almost all such generation," said the FERC, creating "the potential for higher wholesale electricity prices."

Nevertheless, despite all this evidence of market power, the Enova/PE merger won approval, conditioned on mitigation remedies.fn11

Retail Impacts:

"Ducking" the Issue?

If the FERC review process elicits a common complaint, it's that witnesses must speculate in calculating market shares and totals for changes in the Herfindahl-Hirschman Index, the indicator of market concentration.

Witnesses must run a separate test for each market and each eventuality. Will an ISO form? Which utilities will join the ISO? How will the group design a transmission tariff? Will all other third-party mergers close? Should FERC treat pending mergers or proposed plant divestitures as already completed in analyzing market share?

Similar issues arise with the prospect of retail competition. If a state approves retail choice for consumers, utilities will require less generation reserved to serve captive, or native load, customers. This reduction in native load reservations will free up more capacity as available, changing market share. Should the FERC speculate on the likelihood of retail choice in a state in which the merged company plans to operate?

In the Constellation merger case, a staff member of the FERC's Office of Economic Policy had submitted testimony on market shares based on economic capacity. The witness, David Patton, assumed that retail choice was coming in Maryland, freeing utility generating capacity otherwise dedicated to native load. That assumption produced greater market shares for Potomac Electric Power Co. and Baltimore Gas & Electric. As a result, Patton saw the merger as anticompetitive.

Patton's reliance on "economic capacity" instead of "available economic capacity" violated the FERC guidelines. In fact, the merger applicants introduced testimony by professor Paul Joskow, of MIT, to rebut Patton's claims. As Joskow argued, "Mr. Patton has not applied the [merger guidelines] properly ¼ He has failed to ¼ take into account the fact that the lowest-cost generating capacity is dedicated to serve retail customers at regulated rates."

The parties eventually abandoned the deal, but the case was not without impact. The FERC decided to leave the question of retail competition to the Maryland Public Service Commission, which then punted the issue.

As attorney Sara Schotland (Cleary, Gottlieb, Steen & Hamilton) later described it in comments filed on behalf of the Electric Consumers Resource Council in the Conectiv case, "surprisingly, [the] Maryland PSC ¼ flouted its implicit commitment to examine ¼ retail competition."

Schotland continued, "FERC cannot duck the effect of this or other mergers on retail markets."

The FERC later affirmed its stance in the FirstEnergy case, also involving a combination of neighboring utilities that might otherwise have competed for the same retail customers. The commission said it could not investigate retail markets, even if asked to do so by state regulators, unless the state lacked legal authority to review the issue itself.

Since then, the Public Utilities Commission of Ohio consistently has argued that the FERC should consent to review retail competition if asked by a state. Nevertheless, the FERC denied Ohio's plea in its Nov. 10 order requiring a hearing to review the pending merger between American Electric Power Co. and Central and Southwest Corp. But the FERC did take up a request for retail review from the Missouri PSC, which said it lacked jurisdiction.fn12

The National Rural Electric Co-operative Association opposes the FERC policy. In its comments in the merger rulemaking, NRECA considers the reality of politics: "[I]t is unlikely that state regulators will often take the political risks associated with admitting a lack of sufficient authority." NRECA adds, "Thus, ¼ when a state lacks interest, authority or adequate resources ¼ the retail effects of a proposed merger are essentially beyond the scope of any governmental review."

AEP: The Biggest Utility?

If a merger between neighbors can attract opposition, consider the reverse - a merger between utilities so distant they hardly operate on the same plane. That describes the pending deal between AEP and CSW - a merger seen not so much as "vertical" or "horizontal" as "radical."

In their protest against the deal, filed June 30, NRECA and the American Public Power Association describe the proposal as "unprecedented in size and scope - a difference in kind, not just degree."

If approved, the AEP merger would create the largest electric utility in the country: $30 billion in assets; $11 billion in annual revenues; 4.7 million customers in 11 states stretching from Virginia northwest to Michigan and southwest to Texas.

The protest called it "non-horizontal," noting that the FERC's competitive analysis would bear "no necessary relation" to the actual operations of the merged company.

"The result," say APPA and NRECA, "could be an electric utility on steroids, bulking up for bulk's own sake."

In their application, filed at the FERC on April 30, the merger applicants don't disagree. However, they see an advantage in their unique geographic relationship: "Since [we] currently have no more than a de minimus presence in each other's markets ¼ the merger should not have more than a negligible effect on [our] combined share in any relevant market.

"The merger," they note, "satisfies all Appendix A HHI safe harbor criteria ¼ in nearly all destination markets."

AEP operates in seven states: Ohio, Indiana, Kentucky, Michigan, Tennessee, Virginia and West Virginia. CSW's four subsidiaries operate in Texas, Oklahoma, Arkansas and Louisiana. The two systems do not touch. However, in the most controversial aspect of the deal, AEP and CSW say they will reserve a contract path of 250 MW of transmission capacity on 345-kilovolt lines running from AEP's interface with Ameren to a second interface between Ameren and CSW (Public Service Co. of Colorado). This line, similar in idea to the link planned between PSC of Colorado and Southwestern Public Service Co. (which proved critical to the FERC's OK of the New Century Energies merger), would allow AEP and CSW to integrate their operations as a combined system and ISO. However, the 250-MW reservation would increase AEP's market power in CSW destination markets. To compensate, AEP would sell off 320 MW into the Southwest Power Pool and the Electric Reliability Council of Texas. AEP would offer a sales price of the lesser of $14 per megawatt-hour or the variable cost of CSW's SPP companies, but could recall the sale by paying $60 per MWh.

The new AEP ISO would operate coincident with the boundaries of the new merged company. It would take responsibility for transmission planning but would not carry out central dispatch. Until the new AEP ISO could set up a single system-wide transmission tariff, the merged company would introduce a two-zone pricing scheme for transmission. This scheme would echo key differences in the transmission systems of the two merger partners. AEP operates 2,000 miles of 765-kV lines. It has made greater use of such extra-high-voltage lines than any other U.S. utility, imposing high costs on its transmission system. By contrast, CSW operates a cheaper, though still unique transmission regime. Its four operating subsidiaries lie both in ERCOT and the SPP, tied only by asynchronous DC lines. As the applicants testified, the proposed two-zone tariff reflects their different cost structures: the west zone comprising the existing CSW system and the east zone the AEP system. "The principal reason," they add, "is avoidance of repeated rate shocks to transmission customers."

Shocking or not, the application has elicited a raft of protests, many filed at the end of June, right after the worst of last summer's Midwest price spikes.

Some of the complaints carry an emotional charge. The American Electric Group, representing municipal utilities in Ohio, Texas, Indiana, Louisiana and Oklahoma, accuses AEP and CSW of "a long history of anticompetitive or monopolizing activities, discriminating behavior and broken promises." Other complaints focus directly on the merger review process.

The CSW Customer Group, representing rural co-ops in Texas, Oklahoma and Arkansas, says the merger could harm competition in the Southwest Power Pool. It attacks the market power analysis offered by Hieronymus of Putnam Hayes & Bartlett. It accuses Hieronymus of understating both available transmission capacity and the competitive power price in the CSW-SPP market, thus understating AEP's potential market share (by underestimating how much electricity AEP could export economically to the SPP).

Economics professor William Shepherd also testified for the CSW Customer Group. Shepherd hints that the 250-MW reservation will do more than just link the two systems.

Describing the 250-MW path, Shepherd notes, "This appears to be an arbitrary figure ¼ That AEP has lots of low-cost capacity and CSW has a capacity shortage, suggests that the merged company would have a great incentive to transfer as much AEP capacity as they need."

Shepherd's point is countered, however, by Hieronymus:

"Understand that exactly the same theoretical competitive 'injury' would have occurred without a merger if CSW had arranged 1) a 250-MW firm purchase from an unaffiliated AEP, and 2) the firm 250-MW transmission path through Ameren to facilitate the power purchase. Such a transaction would not even be subject to commission review."

Charles Liebold, a consultant with GDS Associates, shows how the link would create problems with parallel flows, undercutting AEP's market power analysis: "Only about 5 percent of the AEP-to-CSW transfer follows the entire contract path ¼ loop flows ¼ may cause other systems to adjust their posted ATC values."

New Century Energies questions why AEP and CSW should rely on a firm, private path to link their two systems, when that company won approval for its merger only after agreeing to hold an open process to plan and build the tie line between PSC of Colorado and SWEPCO. Otherwise, "the proposed interconnection could be situated, operated and controlled in such a way as to adversely affect competition."

The Bigger Question:

Whither Open Access?

Some parties that have filed comments in the FERC's rulemaking case point out that if Order 888 was working, and if transmission access was truly open, then the market power screen wouldn't be needed.

A similar theme arose in the AEP merger case in October, just before the FERC decided to set the case for a hearing.

In a late-filed motion asking the merger parties for more data on ATC and transmission interruptions, Enron Power Marketing Inc. and Electric Clearinghouse urged the commission to pay just as much attention to transmission access and pricing as to generation market share. They suggested that because of preferences for native load, the companies could adopt a transmission pricing structure that could discriminate against them and yet remain "almost impossible to detect."

AEP and CSW fought back, however. They argued that Enron's attack was really an indictment of the FERC's policy to reserve network transmission service for native load. As the merger applicants explained:

"The claims of transmission 'dominance' are not challenges to [our] actions. They are ¼ a broader challenge to current FERC policy regarding retail unbundling."

Nevertheless, these complaints about native load don't seem to go away. In their rulemaking comments, APPA and the Transmission Access Policy Study Group placed the blame for an ineffective policy squarely on the FERC:

"[T]he failure of functional unbundling ¼ would come as no surprise to experienced antitrust enforcers in the Department of Justice and the Staff of the Bureau of Economics of the Federal Trade Commission. In the rulemaking process leading up to issuance of Order 888, both told the commission that structural reform, through 'operational unbundling' or ISOs, was necessary to achieve the commission's goals. Both warned the commission that behavioral remedies and standards and conduct would not be effective."

Bruce W. Radford is editor of Public Utilities Fortnightly.

The FERC Test: Blind to Arbitrage?Some see errors in the competitive screen.

The Problem. Assume two utilities merge in eastern Pennsylvania, within the PJM pool. Assume that cheaper resources can be found to the west, in ECAR, with little problem with transmission constraints. The FERC policy might have the applicants consider those resources in calculating pre- and post-merger market shares. But what if the ECAR plants sell instead in Ohio, where forced and planned outages pushed prices up?

Arbitrage. The FERC's so-called "delivered price test" ignores customer demand or whether sellers might find a better price elsewhere. It ignores opportunity costs, demand and arbitrage - some of the variables that make commodity markets dynamic.

"Simply Incorrect." In comments filed in the merger docket, the Southern Co. urges the FERC, when calculating market shares, to limit a supplier's capacity to the demand in the market. Southern notes that when competing for a sale of 50 MW, a seller with 1,000 MW to offer holds no greater competitive advantage than one selling 100 MW. Southern says the FERC "was simply incorrect" when it refused in the FirstEnergy case to make such an adjustment.

EEI's Answer. The Edison Electric Institute takes the lead in opposing the FERC's DPT method, instead recommending a model called the "Hypothetical Monopolist Test," derived directly from the FTC's 1984 Horizontal Merger Guidelines. For expert support, EEI called on Mark Frankena, senior vice president at Economists Inc., Washington, D.C., and the former deputy director for antitrust in the FTC's Bureau of Economics.

Ask the Question. Frankena argues that the FERC's DPT model (focusing on destination markets for products) can understate the geographic scope of competition. He infers that HMT does a better job of dealing with opportunity costs, customer demand, arbitrage and market dynamics. (Frankena also presented his model in testimony filed in the LG&E Energy Corp. merger case.)

EEI explains: "DPT assumes the seller can price discriminate in each of the target markets, while the HMT assumes that the seller cannot ¼ unless there are factors ¼ that may make discrimination possible." Thus, adds EEI, "DPT in effect starts with the answer and works backward, while the HMT starts with the question and works forward."

1 Comments, p. 6, filed Aug. 24, 1998 by Nat'l Rural Elec. Co-op. Asso., in FERC Docket RM98-4-000. Other groups filing significant comments include: Edison Electric Institute, American Public Power Association, Transmission Access Policy Study Group, National Association of Regulatory Utility Commissioners, National Association of State Utility Consumer Advocates, the consulting firm of Putnam, Hayes & Bartlett Inc., Wisconsin Electric Power Co., the Southern Co., Sempra Energy and public utility commissions in New York, Indiana, Ohio and Missouri.

2 Cudahy, Richard D., "The FERC's Policy on Electric Mergers: A Bit of Perspective," 18 Energy Law Journal 113 (1997).

3 "Making the Transition from Regulation to Competition: Thinking About Merger Policy During the Process of Electric Power Restructuring," address by Joel I. Klein, assistant attorney general, U.S. Dept. of Justice, Antitrust Division, at the FERC Distinguished Speaker Series, Jan. 21, 1998. The APPA and NRECA later petitioned the FERC for a moratorium.

4 Britain's National Grid PLC's agreement to purchase the New England Electric system is another merger that will test the limitations of FERC's merger guidelines. The $4.6 billion deal was announced December 15.

5 Order No. 592, Docket No. RM96-6-000, Dec. 18, 1996, FERC Stats. & Regs. ¶31,044.

6 Notice of Proposed Rulemaking, FERC Docket No. RM98-4-000, Apr. 16, 1998.

7 Case 96-E-0897, July 15, 1998, 188 PUR4th 149 (N.Y.P.S.C.).

8 Naeve also represents Western Resources Inc. before the FERC in its effort to merge with Kansas City Power & Light Co.

9 Economic capacity minus the capacity needed to serve native load customers. ("Economic" capacity denotes resources that can be supplied and delivered to a given destination market, after paying for all transmission and ancillary services, at a price no higher than 5 percent above the pre-merger market price for that market.)

10 Capacity not already committed to long-term firm sales, but including capacity acquired by long-term firm purchases.

11 Some merger opponents complained unsuccessfully that San Diego Gas & Electric Co. held the only NOx emission allowances available in the San Diego Air Pollution District, and thus enjoyed monopoly power in generation. The Natural Resources Defense Council has raised the same issue in comments it filed in FERC Docket No. RM98-4-000, that the commission should consider availability of environmental permits when it analyzes market power in merger reviews.

12 Whether the Ohio PUC will ever review the AEP/CSW deal is problematic. The application by AEP and CSW indicates the parties will file for state review only in Texas, Oklahoma, Arkansas and Louisiana - the states of operation of the CSW subsidiaries that AEP would acquire.

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