USE OF U.S. ECONOMY UPHELD FOR EQUITY CALCULATIONS

The Federal Energy Regulatory Commission, in seven rate cases involving interstate natural gas pipelines, has upheld a new policy on the appropriate long-term growth rate to be used in computing their return on equity. Five of the pipelines contested FERC's new policy, as announced in Opinion 396-b.

The Commission defended the rate-setting method, but decided to allow the pipelines a chance to prove why the rules should not apply to them. The contesting pipelines are: Trailblazer Pipeline Co. (Docket No. rp97-408-002); CNG Transmission Co. (Docket Nos rp97-406-001 and rp96-144-001); Equitrans, LP (Docket Nos. rp97-346-003 and tm97-324-001); Koch Gateway Pipeline Co., (Docket No. rp97-373-001); and Wyoming Interstate Co., Ltd. (Docket No. rp97-375-001).

On June 11, the FERC had applied the long-term growth rate for the U.S. economy, as measured by the gross domestic product, to use with the discounted cash flow method to set rate of return on equity for Northwest Pipeline Corp. (Opinion No. 396-b, Docket Nos. rp93-5-025 and rp93-96-005) and Williston Basin Interstate Pipeline Co. (Docket Nos. rp92-163-007 et al.). The Commission used an average of GDP projections from well-known forecasting firms: DRI/McGraw Hill's Energy Review and the DOE's Energy Information Administration's Annual Energy Outlook.

FERC Chair Hoecker said he plans to call a mid-winter conference to discuss the relationship between the evolving gas business and financial markets, including Wall Street.

FERC APPROVES AMEREN MERGER

The FERC has approved the merger of Union Electric Co. and Central Illinois Public Service Co., a subsidiary of CIPSCO, to form a new holding company, Ameren Corp. (Docket Nos. ec96-7-000 et al.).

The FERC on Oct. 15 found that a five-year rate cap would shield ratepayers from any merger-related increases. It found that competition will not be harmed, and that concerns over possible transmission constraints on Union Electric's system had been alleviated by Union Electric's plans to expand its transmission facilities.

The combined electric and gas assets of the two utilities are valued at $8 billion. The new company will serve 1.5 million electric and 300,000 natural gas customers in Missouri and Illinois. While merger approval has been received by the commissions in Missouri and Illinois, approvals still are needed from the Securities and Exchange Commission and the Nuclear Regulatory Commission.

COALITION CHALLENGES NEW YORK COMBO

A coalition has filed a petition at the FERC asking that it reject the proposed Long Island Lighting Co. and Long Island Power Authority combination.

The coalition claims the transfer would block competition on Long Island for at least 10 years and would eliminate future regulatory oversight of the two companies.

The arrangement calls for the nonprofit LIPA to assume and refinance with tax-free bonds the $7.6 billion of debt owed by LILCO. Thereafter, LILCO would retain its generating assets and gas distribution system but give LIPA an option to purchase the power plants in the fourth year of the deal. In any case, LIPA would purchase 3,900 megawatts of LILCO capacity for at least 10 years.

In the petition, the coalition claims that, "A private monopoly intends to deprive local consumers of real competition, effective regulation and lower rates by masquerading as a benign public entity."

Members of the coalition include Citizens for a Sound Economy, Cilcorp Inc., Wheeled Electric Power Corp., and many business owners.

BINGAMAN INTRODUCES FEDERAL RESTRUCTURING BILL

Sen. Jeff Bingaman (D-N.M.) introduced a new national electric restructuring bill, "The Federal Power Act Amendment of 1997," which he claims would lower electric rates through improved federal regulation, rather than by mandating retail electric competition.

"The inefficiencies in our transmission system are impeding open and fair competition, and are driving costs up for electricity consumers from Las Cruces, New Mexico to New York City," said Bingaman. "Until we have open competition for the sale of wholesale power, prices for consumers will not be nearly as low as they should be."

Bingaman's Oct. 8 bill would give states clear authority to order retail wheeling, including authority to levy access charges for stranded cost recovery. A reciprocity provision would allow states to bar utilities from states that do not have competition. Full recovery would be allowed of costs from purchased power contracts under PURPA.

The bill would enhance the FERC's authority to ensure transmission lines are reliable and operated fairly by allowing it to establish national reliability standards. FERC's Federal Power Act authority would be extended to include transmission systems owned by rural electric co-ops, Tennessee Valley Authority, municipal utilities and power marketing agencies. It would authorize a process for siting new or enlarged interstate transmission lines to increase system reliability, reduce market power or mitigate stranded investments. The FERC also could force utilities to participate in regional independent transmission systems under an independent system operator.

EX-COMMISSIONER QUESTIONS FERC's MERGER POLOCY

In his first speech since leaving the FERC, former commissioner Donald F. Santa Jr. addressed a variety of issues concerning the FERC's policy for approval of electric utility mergers. Speaking on Sept. 25 at the INGAA Natural Gas/Electric Convergence Conference in New York City, Santa noted that as last December's Merger Policy Statement and Appendix A are applied to actual merger applications, new issues have emerged.

These issues include transmission constraints, a key factor in both the Primergy and First Energy merger orders. In working through these new issues, the FERC has made some "very conservative assumptions" in defining relevant geographic markets, Santa said. In some cases, these assumptions have led to findings of narrow markets and high concentration within those markets, he added.

Santa said that if the FERC tightens its definition of the relevant geographic market, as suggested by Commissioner Vicky Bailey, perhaps it should relax the ceilings for the Herfindahl-Hirschman Index, used to determine market power. Santa said there is less need for conservative screening numbers. "What's so magic about an 1,800 HHI or a delta of 50 or 100 points?" he queried. (HHI of more than 1,800 could mean a merger would create market power).

"Think of all of the sectors of our economy where markets are demonstrably competitive, and yet where, if you crunched the numbers, the HHI very likely would exceed 1,800," he said.

While finding the framework of Appendix A sound, Santa questioned some of its "nuts and bolts." He noted that the appendix directs merger applicants first to examine its destination markets. In particular, it instructs applicants to start with markets defined in terms of each of the utilities directly interconnected with the applicants and the suppliers that can serve each of the destination markets.

"If one must look at each destination utility as a separate market, won't this produce markets that are too narrow?" he asked. He said that such a narrow definition would "ignore the fact that unless it's proven that such a market is in fact economically and physically isolated, a seller cannot isolate the market for purposes of exercising market power?"

Santa turned to the concept of available economic capacity, which focuses on the capacity available to respond to an applicant's attempt to exercise market power. He said AEC ignores capacity controlled by the buyer that can be brought on line in response to an attempt by the seller to increase prices. That analytical flaw is "puzzling," according to Santa, because in other parts of the appendix, the FERC accepted that one should examine a purchaser's capacity that could be turned on in response to a price increase by external suppliers.

He emphasized that market power analysis never will be a "cookie-cutter" exercise. But the FERC's market power analysis is becoming increasingly standardized.

Santa is vice president and deputy general counsel of LG&E Energy Corp.

Lori A. Burkhart is an associate legal editor with Public Utilities Fortnightly.

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