THE RECENT INCREASE IN MERGER ACTIVITY IN THE energy and telecommunications industries has concerned state regulators for some time. Such concern reveals how the practical or "local" aspects of business deals often clash with broader national issues reviewed by federal authorities in merger cases.

In electric utility mergers, for instance, the Federal Energy Regulatory Commission will address effects on competition, rates and regulation. It will pay close attention to "macro" factors, such as whether industry consolidation or concentration of market power comports with federal goals for electric deregulation and restructuring. %n1%n

By contrast, state regulators examining merger proposals will focus primarily on matters of local concern. %n2%n Regulators try to identify who the merger will benefit or harm, including its effect on the local job market and economic development efforts. They will attempt to identify and allocate merger-related "savings" and maintain quality of service, rather than pay too much concern to the overall goals of electric restructuring. %n3%n However, as does the FERC, state regulators will seek to confirm their ability to maintain ongoing regulatory oversight after the merger.

Mergers and Local Benefits: Mutually Exclusive?

A decision issued last year by the District of Columbia Public Service Commission demonstrates the tension between local concerns and broader industry issues facing state regulators as they review merger proposals. In this case, the commission approved, subject to numerous conditions, the proposed merger of Potomac Electric Power Co., and Baltimore Gas and Electric Co. %n4%n

Under the plan submitted to D.C. regulators, the two utilities would combine to form a new entity, Constellation Energy Corp., which would be headquartered in Annapolis, Md. Proponents of the plan had argued the merger would increase the companies' chances of survival in a competitive market, thereby assuring that consumers could continue to receive their electric service from a locally based company.

The proposed plan included: a 30-month rate freeze; expansion of low-income assistance and economic development programs; improved response to minority-business purchasing efforts; construction of a $90-million building to house District-based operations; and a plan to share with ratepayers about $1.3 billion in merger-related savings over the next 10 years.

The commission rejected the companies' merger proposal based on several concerns. The commission was worried, for instance, that the new company might lose interest in economic development and minority contracting efforts in the city. The PSC also was concerned with the allocation of benefits and risks between Maryland and District of Columbia ratepayers.

It concluded that while the proposal might offer the city a "more efficient, lower cost electric company" it could not approve the merger proposal as is. In addition to a four-year rate cap, the commission ordered a $99.5-million refund to ratepayers and a $94.5-million monthly rate reduction credit on consumers' bills.

The commission instructed the new company to set up a $5-million economic development fund and to adhere to existing commitments made by PEPCO concerning "minority and protected class" procurement practices. The commission also ordered the company to exclude costs associated with BG&E's generating facilities from District base rates and to maintain staffing in the District. Finally, it required adoption of necessary record-keeping procedures to protect the commission's ability to regulate the new company.

Market Power: A State-Specific Issue?

Do state PUCs offer a logical forum in which to consider issues of market power posed by a proposed utility merger?

Such issues appeared to play a key role in Missouri, when the state public service commission authorized the merger of Union Electric Co. and CIPSCO Inc. The PSC required, however, that Union Electric join in the formation of an independent system operator for the region's transmission system that is consistent with guidelines established by the Federal Energy Regulatory Commission. (Union Electric is a Missouri energy utility and CIPSCO is the corporate parent of Central Illinois Public Service Co., an Illinois energy utility.) The proposed merger will include the formation of a new entity, Ameren Corp., as a federally regulated utility holding company.

To address concerns regarding barriers to market entry and the exercise of horizontal market power, the Missouri commission required Union Electric to produce a detailed study of the state's "electric markets and submarkets" as well as develop models and indices to test market performance. The commission said that after reviewing the work it would consider taking action to mitigate market power before establishing statewide retail competition. %n5%n

In similar fashion, the Oregon Public Utility Commission appeared particularly concerned with new market developments when it approved the proposed merger of Portland General Electric Co. into Enron Corp.

Under the approved merger plan, Enron and the utility's corporate parent, Portland General Corp., will merge with Enron as the surviving corporation. As a result of negotiations between the merging companies and the commission's staff Enron has agreed to guarantee "monetary compensation and benefits" to Oregon ratepayers of $141 million. %n6%n

Telecommunications: A Different Animal?

In the telecommunications field, the proposed merger of two of the country's largest local exchange carriers, NYNEX and Bell Atlantic Corp., set off alarms at several East Coast PUCs.

With efforts under way to revamp the local telephone market, market-power issues received a full hearing. But other local concerns such as the potential loss of corporate headquarters also were addressed.

Regulators in Maine, Vermont and New York approved the merger, but imposed similar conditions designed to protect the interests of ratepayers in the region. The conditions address concern over how the merger might affect the development of competition in the local exchange market, a high-profile regulatory effort already under way in each state.

Both the Maine commission and the Vermont Public Service Board required, as a condition to the merger, that the New England Telephone and Telegraph Co., by Sept. 30, 1997, should satisfy the "competitive checklist" laid out in section 271 of the Telecommunications Act of 1996. The checklist was designed to test whether a Bell operating company has opened its system to competition enough to justify its entry into the interLATA toll market. The list requires a carrier to offer interconnection services and access to local facilities. %n7%n

The New York Public Service Commission reserved the authority to reduce rates beyond those currently established in NYNEX's Performance Regulatory Plan if certain conditions are not met. It said that the merged company must keep its commitment to: (1) maintain headquarters in New York City; (2) invest $1 billion in service-related infrastructure over the next five years; and (3) hire between 750 and 1,000 employees to address service quality problems. %n8%n F

Phillip S. Cross is a contributing legal editor with Public Utilities Fortnightly.

1 See, e.g., Policy Statement Establishing Factors in Evaluating Whether a Proposed Merger is Consistent with the Public Interest, Docket No. rm96-6-000, Order No. 592, Dec. 18, 1996, 77 FERC ¶ 61,263, 61 Fed.Reg. 68,595, Dec. 30, 1996. For additional analysis on the FERC's electric utility merger guidelines, see, "What's New About the FERC's New Utility Merger Policy?" By Marvin T. Griff, Public Utilities Fortnightly, Feb. 1, 1997, p. 16; "Why Applicants Should Use Computer Simulation Models to Comply with the FERC's New Merger Policy," by Mark W. Frankena and John R. Morris, Public Utilities Fortnightly, Feb. 1, 1997, p. 22.

2 See, Re Puget Sound P&L Co. et al., 176 PUR4th 239 (Wash.U.T.C.1997); Re East Ohio Gas Co., Case No. 96-991-ga-unc, Dec. 19, 1996 (Ohio P.U.C.); Re SW Pub. Serv. Co., Case No. 2678, Jan. 28, 1997 (N.M.P.U.C.); Re Interstate Power Co., 177 PUR4th 409 (Minn.P.S.C.1997).

3 See, Re Louisville Gas & Elec. Co., Case No. 97-300, Sept. 12, 1997 (Ky.P.S.C.) (approves merger of Louisville Gas and Electric Co., and Kentucky Utilities Co., but finds no need to examine the effects the merger might have on the state's electric market at this time due to "the total absence of direct competition in Kentucky's existing retail market"). But see, Re Delmarva P& L Co., PSC Docket No. 97-58, Sept. 23, 1997 (Del.P.S.C.) (approves merger of Delmarva Power and Light Co. and Atlantic City Electric Co., but PSC will review market-power concerns associated with the planned merger as part of ongoing investigation of electric restructuring).

4 Re Baltimore Gas & Elec. Co., Formal Case No. 951, Order No. 11075, Oct 20, 1997 (D.C.P.S.C.); See also Re Baltimore Gas & E. Co., 176 PUR4th 531 (Md.P.S.C.1997). (Maryland officials approve merger proposal with conditions.)

5 Re Union Electric Co., 176 PUR4th 201 (Mo.P.S.C.1997).

6 Re Enron Corp., 177 PUR4th 587 (Ore.P.U.C.1997).

7 Re New England Teleph. & Teleg. Co., and NYNEX Corp., 175 PUR4th 490 (Me.P.U.C.1997); Re New England Teleph. & Teleg. Co., dba NYNEX Corp., 175 PUR4th 504 (Vt.P.S.B.1997).

8 Re New York Telephone Co. dba NYNEX Corp., Case Nos. 96c0603 & 96c0599, Mar. 20, 1997 (N.Y.P.S.C.).

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