Deregulate in haste; repent at leisure. That's what they say about love, marriage, and ratemaking. Yet, in the utility business the regrets are pouring in (em sometimes from the same people who sent out the invitations.
For example, at the end of November, a week before I put fingers to keyboard, the FERC was shocked to discover that the proposed Altus merger between The Washington Water Power Co. and Sierra Pacific Power Co. would achieve no fuel savings related to integrated operations and central dispatch and, because of their geographic separation, the two companies "will be operated as two separate electric control areas and will not be jointly dispatched as a single integrated system." The FERC saw no other choice but to grant motions to intervene, put off immediate approval of the merger, and consolidate the proceedings for hearing and decision. (See, FERC Dkt. Nos. EC94-23-000, ER95-808-000, Nov. 29, 1995 (draft order).) The decision to wait assigned even greater importance to the campaign now underway by Commissioner Massey to push the idea of stricter merger approval guidelines at the FERC, in anticipation of open-access transmission as well as a predicted horizontal concentration in the electric industry (utilities, in Massey's words, would "combine to get ready for disaggregation"). Readers may want to return to our January 1 issue and reread the article, "Hurdling Ever Higher: A New Obstacle Course for Mergers at the FERC?," by attorneys John P. Mandt and Karl R. Moor, which takes issue with several of Massey's ideas.
Efficiency is the last bastion of the regulator.
A Long Courtship
The urge to merge goes way back. The Public Utility Act of 1935, which ushered in the Federal Power Act and the Public Utility Holding Company Act (PUHCA), reveals the antimerger bias prevalent at that time, which once formed the groundwork an unsuccessful presidential campaign, and may in fact do so again. (See, "The Revenge of Wendell Wilkie," this issue, by James Moeller). Today, with yet another PUHCA reform bill in the hopper (S. 1317, introduced October 12 by Sen. Alphonse D'Amato), it may be time to reread the Act and figure out what all the fuss was about.
In putting this issue together, author Jon Erik Kingstad ("Merger Menace: Holding Companies and Overcapitalization," p. 42) kindly sent me a copy of the Senate report prepared during the PUHCA legislative debate by the National Power Policy Committee on Public Utility Holding Companies. Among other things, the report examines "the intensification of economic power beyond the point of proved economies," and describes such activity as "a form of private socialism inimical to the functioning of democratic institutions and the welfare of a free people." That was the Depression, when inequality of incomes threatened to erode American democratic institutions.
Is today any different? In October I attended an American Bar Association meeting and heard economist Alfred E. Kahn deliver a two-hour unrehearsed talk on utility competition. Kahn, who is known to support recovery of stranded investment, sees some of the more promising models for utility deregulation as including "competitively neutral charges" (e.g., exit fees, access charges, or a universal service fund). But he sees no fool-proof way to determine whether deregulation will impose monopoly rents: "There is no way of knowing whether the new competition is efficient, or whether it is simply taking advantage of arbitrage opportunities."
But Kahn acknowledges the possibility of extensive layoffs in energy utilities, and warns not to discount the importance of what another writer has tabbed, "The Clash Between Progress and Security."
Might holding companies again threaten the common good, at the very moment that the FERC has apparently made the world safe for PUHCA reform? As FERC Commissioner Massey ponders, "Perhaps our standard for evaluating mergers should be whether a merger is efficient and consistent with robust competition."
PUHCA is dead. Long live PUHCA.
Nothing Beats a Divorce
On December 5 I rode down for the day to the DOE-NARUC National Electricity Forum, III, where I heard Steven Fetter (analyst, global power regulation, Fitch Investors Service, L.P.) poke holes in three assumed "truths" of the electric utility industry.
Hollow Truth No. 1: Competition is coming and regulators can't stop it. "I have yet to find a regulator who has the stomach to let markets operate," says Fetter. He predicted that the California Public Utilities Commission would eventually create a new system of subsidies. (The next day, the CPUC postponed its planned release of a final proposed rule in the "Blue Book" case until December 20, after press time.)
Hollow Truth No. 2: States will serve as laboratories for change. With all the federal-state jurisdictional conflicts that now persist, Fetter sees "no rush" by state regulators to give up power.
Hollow Truth No. 3: Functional separation will work. Fetter believes that total corporate divestiture will eventually prove necessary to mollify retailers facing vertically integrated competitors who control bottleneck facilities. "What about the 100,000 unionized dispatchers nationwide, with contracts and pensions, who work in utility control centers. Will they simply disappear when we appoint an independent system operator?"
Fetter cited the example of the AT&T divestiture, in which rules enforcing open network architecture did not prevent Bell Atlantic, reportedly, from barring employees of MFS (the competitive access provider) from using Bell company bathrooms.
Nothing beats a real divorce.
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