s Merger Magic
"Occasionally, yes. There are obviously some fairly easily measurable synergies in some mergers. . . . The real issue, however,
is not whether there are savings. The real issue is could those savings have been obtained without concentrating the economic power that goes with a merger?
"Generally, we've dealt with it with judgment. That is, somebody in authority, usually the antitrust authorities or a judge, makes a decision with the two principals that guide the decision. . . . There is a general bias against concentrated economic power in this society, and therefore, if there are two firms merging with any indication of monopoly power at all, that deserves a very careful scrutiny. And the second bias overlaps the first one. And that bias is: You don't approve the merger if the gains can be accomplished in any other way without the merger."
s Debt Service
"Two things are going to raise the cost of generation a little. For the first time, the history of the industry and the real risk of making these long-term capital investments are going to fall on the investor. . . . One of the great defects of the regulatory system was it drafted a group of amateurs called ratepayers and made them the principal risk-bearers for these very durable capital-intensive pieces of equipment. And they have had to pay a very big price for being drafted in that role.
Yes, there will be an increase in the cost of money for generators."
s Hard Numbers
"I don't know. I hear these statements that we're going to end up with a small oligopoly (em a couple hundred, with probably 15 or 20 of them being large and the rest of them tailing off with smaller sizes to meet special needs.
"Setting the number of transmission companies is a tougher issue. If I had my preferences, we'd probably end up with 10 or 12. But I've never quite been able to defend that. I see no reason why we should not be able to plan and operate a transmission system much better if it spanned a very large, single trading area that spanned several states."
"Existing antitrust laws are designed to [prevent market power]. We all have our own views as to how well they do that, but they probably protect us from the more serious and prolonged abuses. And I see no reason why we need anything special on the electric side, although I would like to see better performance out of the antitrust people in a lot of dimensions. . . . I do think, however, that during the transition period it is the task of the FERC to make sure we get a competitive market in generation." t
Charles G. Stalon, an independent consultant in Cape Girardeau, MO, has been a commissioner for both the Illinois Commerce Commission and the FERC. Prior to his consultancy, he was director of the Institute of Public Utilities and a professor of economics at Michigan State University. He recently chaired the Competitive Power Market Working Group in California.
s Merger Magic
"Just take our merger, for example. I think there's signifi-cant evidence that mergers produce efficiencies in the operation, and that the benefits of combining two companies is to the
benefit of both consumers and investors. For instance, in 1995, our earnings increased roughly 17 percent over 1994. The primary reason . . . was because of the nonfuel operation and maintenance savings we had. So we realized about $42 million in savings . . . by combining the two companies.
"Look at the seven mergers announced in 1995. They estimate there would be roughly $6.5 billion in savings over 10 years.
"The reason we exceeded our targeted savings amount is that we found all kinds of good surprises. One company would do one thing one way and another way. We were able to combine these and come up with more efficient ways to do things."
s Debt Service
"I don't think that mergers raise the capital costs of generation. With respect to a divestiture, I think the cap structure for a pure generation company would be different. There would be greater equity, so the cost of capital for a pure generation company could be higher. . . . But the question is, What is financed? Are the assets financed, or are the underlying contracts for those assets financed?
"The issue to me is that it's not clear that the cost of capital for a pure generation company would be higher. If you had greater equity, you would intuitively believe it would be. But then look at IPPs, with their debt equity, which is really financing off the contract."
s Hard Numbers
"I think we're going to end up with 10 to 15 national generating companies.
"The number of transmission companies is more difficult to see. As you see ISOs develop in different regions, we may end up with a national ISO, rather than just a regional one. . . . It's an open question as to how that unfolds."
(Long silence.) "I'm having a little difficulty understanding what 'unbridled market power' is. But that question sort of presumes that somehow you have market power. . . . It's a biased question. I would quarrel with the notion that you'd have unbridled market power. I don't think that would happen. I don't think you have, today, with natural gas being deregulated, unbridled market power in natural gas. That's a $30-billion market. The commodity market for electricity is a $90-billion market. I do not believe that you're going to have that concentration of market power. That would be detrimental to the efficient operation of the market." t
James E. Rogers is vice chairman, president, and CEO of Cinergy Corp., the holding company of PSI Energy, Inc. and the Cincinnati Gas & Electric Co. The utility serves nearly 2 million customers in Indiana, Ohio, and Kentucky, and is the 13th largest investor-owned utility in the United States, based on generating capacity. Rogers's many previous posts include work as an assistant to the chief trial counsel at the FERC.
s Merger Magic
"There was a long period until the sixties when it was believed that bigger was better and mergers might therefore give advantages of bigness, economies of scale. That has been recognized
no longer to be true. And whatever the optimum size is, it's relatively limited in generation. Therefore, mergers that would go much beyond the minimum sense of scale necessary to operate efficiently bear a burden of proof to show they overcome the 'diseconomies' of scale."
s Debt Service
(Long silence.) "Mergers and divestitures are opposites, so you're asking: Would either or both of them raise capital costs, and make it more difficult or risky to function at the generation level? The shortest answer is 'We don't know for sure either way.' That depends on the lenders, on the financial markets, whether a merger or divestiture will go against the firm's prospects in the long run. And that's a two-sided issue (em both for horizontal and vertical mergers. It may even be somewhat case-specific. Mergers in Wisconsin may have some features that differ from mergers in Missouri or New York or wherever."
s Hard Numbers
"Less than now. But I suppose the implicit question is 'Are we going to sift down to just five or six or even fewer and face a truly heroic concentration in the market? . . . My guess is that wouldn't, and shouldn't, be permitted because you need at least five competitors to make a market reliably competitive.
"The TransCos would [follow the] same principles. . . . You really can't have less than five comparable competitors in a market and expect competitors to be strong. Defining the market will be, as in antitrust generally, the decisive step. And there you'll get the usual debates: that the market is only an inch wide, or that it's a mile wide.
"All you've done is left the same basic number of players, except each one is on one level now, rather than three. . . . So the first step is: Don't let mergers run freely. That's the universal response to any advent or likelihood of new competition: Quick. Let's merge.
"The more balanced thing is to wait and look it over carefully, first. But even there, the antitrust agencies that apply what they think are reasonable merger criteria can make mistakes. And they can be bullied or pushed or stampeded or overwhelmed into letting more mergers go through than they really should." t
William G. Shepherd, professor of economics at the University of Massachusetts in Amherst, recently authored "Applying Antitrust to Mergers in the Electricity Industry." The paper was an appendix to a joint petition of the American Public Power Association and the National Rural Electric Cooperative Association, filed with the FERC. Mr. Shepherd is general editor of the Review of Industrial Organization, a research and policy journal.
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