IN APRIL 1997, AFTER FOUR YEARS AS A COMMISSIONER WITH the Federal Energy Regulatory Commission, Donald F. Santa, Jr. announced that he would leave the public sector at the expiration of his term and join LG&E Energy Corp. as vice president and deputy general counsel. Included among his first assignments at LG&E was management of legal matters for LG&E Marketing, the national energy marketing subsidiary of LG&E Corp.
Roger Hale, chairman and CEO for LG&E Energy, praised Santa as "instrumental" in shaping the nation's energy policy and in "writing the ground rules for competition" in the energy industry.
Santa had begun his stint at the FERC when the commission was working hard at implementing Order No. 636, the natural gas restructuring rule, and thus had received an early grounding in gas issues. Later, when the FERC began tackling electric restructuring under its eventual Order 888, Santa drew on his gas experience, which he said gave him insight on gas-electric convergence issues. As he was fond of saying, "I was converging when converging wasn't cool."
As for his move to the private sector, Santa saw it as a chance to keep up with industry changes. "I have had the unique opportunity to be a member of the FERC during one of the most exciting periods in the agency's history," he noted. "Still, regulation is to some degree removed from the reality of the marketplace¼ Consequently, I am excited at the prospect of getting outside the Beltway¼ where the real changes are occurring."
As if to emphasize Santa's words, on March 25 has new employer won approval from the FERC for a merger with Kentucky Utilities, on assurances that the new company would, among other things, continue to participate in the Midwest Transmission System Operator, Inc. By May 4, LG&E and KU announced that they had closed their merger "in record time" for a deal between two franchised electric utilities involving review under the FERC's 1996 merger policy statement.
Addressing a group of lawyers at an American Bar Association meeting, Santa saw it all as ironic. "As late as last July," he said, "I was voting on merger orders at the [FERC], and by last September, I was counseling [the two applicants] and preparing their section 203 application. If only I knew then what I know now."
Spending Shareholder Dollars
LG&E is a new member of the Partnership for Customer Choice. What led to this decision?
LG&E hasn't been a member of the Edison Electric Institute for about two years. I think our CEO, Roger Hale, said the company didn't want to be spending LG&E's shareholder dollars promoting a message on restructuring that he didn't think was LG&E's message. Hale advocated a federal choice mandate with a date shortly after the year 2000, and supports a comprehensive restructuring bill. When I joined the company last fall, one of the things that was put on my "to do" list was to identify ways that the company could more effectively participate in the restructuring debate. When LG&E surveyed the alternatives, the Partnership for Customer Choice came to our attention. PCC members are a lot of the more pro-competitive¼ and when we put the LG&E position side by side with the PCC's principles they were remarkably alike. So we decided this was probably the most effective way for us to participate.
Is Dec. 15, 2000 still a realistic goal now that it's already 1998?
I don't think anything is locked in concrete, and I think that if and when it comes time for the horse trading that goes in to writing legislation, it's certainly something that could be on the table. I think you have to be sensitive to the fact that as the states move forward and as they commit to dates some of them may have phase-ins that go beyond Dec. 15, 2000. [Legislation] might have to grandfather what the states have done. PCC went with the date that was in Rep. Dan Schaefer's (R-Colo.) bill. I think it [made] a statement in terms of a commitment towards wanting choice sooner rather than later.
Too Many Mergers?
Will we eventually see a shake out down to five to ten giant utilities and energy providers, with all the recent mergers? [At the time of the interview, the FERC had not yet announced its approval of the LG&E-Kentucky Utilities merger.]
The conventional wisdom, and I think it's well supported, is that in a restructured industry, scope and scale are going to be important, especially in those aspects of the business that are going to be competitive, so I think you're probably going to see a further consolidation of industry. It's premature to speculate on the ultimate number but I think that you're probably going to see further consolidations dictated by the need for scope and scale in order to be competitive. This doesn't preclude the further vertical disaggregation of the industry as people decide what part of the business that want to be in. It doesn't preclude there being niche players, although they may not be a huge nationwide player.
Will that be best for customers? Won't it reduce choices?
Consumers are ultimately going to benefit from a number of strong companies that have the wherewithal to go out there and basically beat each other over the head, ultimately to the benefit of the consumer. You can say, "the more competitors the better," but the companies need to have the wherewithal to be in it for the long haul. That gets back to the point of scope and scale: There are going to be certain economies of size that will dictate that to be a big player, and certainly a big player nationally, [companies will] need a certain critical mass. If it got to a point where the industry became so consolidated that you only had two or three players really competing, yes, you've got a problem, but we are a long, long way from seeing that happen.
On Returning to the Private Sector
A recent international survey of utility executives by Andersen Consulting found that more than half of the respondents felt that regulators don't understand or recognize their companies' investments. Do you agree?
I don't know. When I was at the commission I made an effort to try to get more up on how the financial community viewed things, talking with analysts in New York¼ but if this is what companies believe, they need to take the initiative to change it. Try to educate the regulators and try to have them understand the financial constraints and conditions that the company is operating under. Now, it remains to be seen what kind of impact it will have, but the recent FERC technical conference on financial conditions in the natural gas pipeline industry is a good step in trying to get that kind of input in there. When you're a regulator, and you're subject to the ex parte rules and all that, what you see in the record of a case is pretty much limited to what you see on paper, and usually the financial community doesn't participate as intervenors in a case.
How do you view the role of regulator now that you're on the other side?
I would hope that regulators take the view that I tried to take when I was at the [FERC], which was to recognize that there are certain segments of the industry [that] still are effectively monopolistic in function and need regulation, but by the same token you have to have some trust in the market with respect to those segments that either are or have the potential to be competitive.
You've got to try and put the incentives in the right place to get people to be efficient. I also think, and this is something I appreciate much more from having been in the industry for [a few] months, that with the market being as fast paced as it is, the delay in getting word from regulators really does hurt, it really does make a difference as people are trying to adapt to what's going on out there. A merger like ours, which isn't one of the biggest mergers sitting out there, nonetheless affects real people in terms of trying to figure out where they're going to be in the new company. There's a role for regulation (em you want to review these things carefully and responsibly (em but by the same token there has to be a recognition that delay brings with it very real-world costs.
Recently, at an American Bar Association conference in Denver, I was talking with a lawyer who does work for PacifiCorp, and he was talking about their transactions with The Energy Group. He mentioned that when the mergers and monopolies commission in Britain receives a merger application they schedule it for decision. It may be [several] months off, but they basically say, "You'll have an answer by this date." And then they commit themselves to doing it. I know that the FERC is strapped resource-wise and has to "do more with less," given budgetary constraints, but nonetheless I think there's some real importance to having word from the regulators, whether it be good or bad, so that people can get on with their businesses. It's hard to say what the average time frame for waiting to hear from FERC is, because the applications received in the 1995-96 time frame [prior to the 1996 Policy Statement] in some ways got held up because the merger policy was in a state of flux. There were some mergers that probably took almost two years to go through the process. Even understanding and knowing first-hand where the commission sat at that time and all the difficulties we had, people were being affected by this.
In the Merger Policy Statement the commission committed that if someone should file a complete application and there are not significant protests of that application, the commission would try to act within 60 to 90 days of the closing of the intervention and comment period. If that's a realistic deadline I really don't know, but I think the commission ought to commit to trying to get through these things in a realistic time frame.
Editor's Note: On April 16 the FERC issued a new notice of proposed rulemaking on mergers, in part to speed up approval. See Docket No. rm98-4-000, 83 ¶ FERC 61,027.
Lori M. Rodgers is contributing editor to Public Utilities Fortnightly.
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