I confess. I haven't yet read the Federal Energy Regulatory Commission's Order 888. But from what I hear, the electric industry is still intact and vertically integrated, and threatening each day to become even more so.

When I saw FERC Chair Elizabeth Moler at an American Bar Association luncheon in late April, only a week before she released Order 888, she said her staff would take a few weeks off to rest after the rule came out ("Virtually all of my working hours have been consumed by the rulemaking-all 28 hours in the day.") and then get to work on a new set of guidelines for electric utility mergers.

Most expect any new merger rule from the FERC to focus on the potential concentration of market power in generation. But some people question whether the FERC has any business raising the hurdle again, especially now that Order 888 ensures open access to transmission. One of those people is David Falck, an attorney and partner with Winthrop, Stimson, Putnam & Roberts. Falck wants to know where the FERC gets authority to investigate generation concentration in setting merger standards.

"Where does it get that jurisdiction?" Falck asks. "The FERC is not investigating the effect of mergers on retail competition, because it has no jurisdiction. Why not apply the same restraint in the area of generation?"

A similar thought is voiced by Steven Kean, vice president for regulatory affairs at Enron Power Marketing, Inc.: "If we could just stop looking up in the sky trying to figure out if it's a federal wire or a state wire, this thing could be over in a couple of months, rather than years."

Creative but Bizarre

When Sithe Energies filed its petition last December in New York's Competitive Opportunities Docket (em urging the state Public Service Commission (PSC) not only to postpone retail wheeling for five years (or until the market could absorb all excess generating capacity) but also to sanction merger incentives to encourage the state's seven major investor-owned electric utilities to combine their assets into only two companies (em Sears Roebuck and the May Department Stores called the proposal "creative but bizarre."

A natural duopoly?

An intervenor group made up largely of industrial customers described the Sithe proposal as anticompetitive, holding no benefits for consumers. It urged the PSC to reject the Sithe idea since it would "exacerbate the utilities' market power, delay customer choice for at least a decade, and perpetuate uncompetitively high electric rates." Meanwhile, the New York State Department of Law reportedly colored the merger idea as a proposal to reduce rates (em not a model for competition. (Say what?)

Last month the PSC declined to adopt the Sithe proposal. As it explained in its May 20 order, "There is no need for specific incentives for corporate rearrangements. . . . Utility mergers can and should take place if (but only if) they make good economic sense and do not lead to undue market power."

Instead, the PSC upheld all major aspects of a December 1995 recommended decision and endorsed a plan complete with a competitive power pool ("Market Exchange"), independent system operator (ISO), Contracts for Differences, and physical bilateral contracts. Moreover, it instructed the state's electric utilities to file plans (at both the PSC and the FERC) by October 1 on seven key points:

s running the pool and the ISO

s transmission pricing

s how to "distinguish" transmission from distribution (the bright line still lives)

s "load pockets" (must-run generation)

s licensing or certification for energy service companies (ESCOs)

s whether to shift the duty to serve to ESCOs

s how to handle metering and billing.

The PSC added, "We strongly encourage divestiture, particularly of generation assets, but do not require it immediately."

A Silver Lining

All this may prove interesting for New York legislator Sheldon Silver, a democrat from the Lower East Side who now holds the post of Speaker of the New York Assembly. I heard him speak back in April, at a meeting on electric utility indentures accounting at the New York offices of Bear Stearns & Co. Silver warned the PSCto stay out of the way and leave it to the state legislature to restructure the electric utility business: "PASNY (Power Authority of the State of New York) has proposed that it should acquire all transmission assets. But the PSC has no jurisdiction to effect such a plan, or to mandate such a plan."

As Silver notes, New York legislators have devised their own plan, known as Competition Plus, which includes two different bills. The two bills would set a timetable for electric competition and customer choice, with continued regulation of transmission and distribution. One bill (Silver describes his plan as "a work in progress") would ensure full customer choice by 2000, split generation from transmission in 2003, and divest electric from gas assets by 2005. A second bill would force PASNY to refocus on its original mission (hydro development) by selling all its nonhydro facilities. The plan would set up funds ("The Energy 2000 Fund") to promote energy efficiency and bridge the competitive transition. The plan would "ensure that contractual obligations among utilities and independent power producers are fulfilled to the benefit of all."

"Regulation by the PSCwon't get us there," says Silver. It's time for the legislature to lead the way.

"The PSC is designed to implement policy. But the statutes don't contemplate competition. The PSC doesn't have authority to restructure the industry. It doesn't have that mandate."

Editor

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