Evolving FERC Merger Policy Delays "Altus" Deal

Fortnightly Magazine - February 1 1996
EES North America

It appears that The Washington Water Power Co. (WWP) and Sierra Pacific Power Co. (SPP), which were hoping for a quick OK on their proposed merger to form "Altus," may have been in the wrong place at the wrong time. Instead of a perfunctory approval, the WWP/SPP merger now may become the test case for evolving merger policy at the Federal Energy Regulatory Commission (FERC).

Perhaps the utilities should have seen it coming. In approving the Midwest Power Systems, Inc./Iowa-Illinois Gas & Electric Co. merger, FERC Commissioners William L. Massey and James J. Hoecker concurred that the FERC should reexamine its merger policy (Docket No. EC95-4-000). They predicted that once a final rule mandating open access and comparable service is in place, the sole competitive effect of future mergers may be to increase the concentration of generation assets, hindering competition. They plan to investigate that threshold as well as mergers of transmission facilities across a region and whether merger applicants should be responsible for achieving efficiency and cost reductions in the course of business outside of the merger option.

Meanwhile, a unanimous FERC has set the proposed WWP/SRP merger for hearing, finding that the parties failed to show the merger to be in the public interest, as required by section 203 of the Federal Power Act. It also set for hearing the utilities' proposed open-access transmission tariffs (Docket Nos. EC94-23-000 and ER95-808-000).

Although the utilities want to combine, their service territories lie about 400 miles apart, and the FERC noted the absence of any plans to consolidate their electric operations. WWP and SPP tentatively have arranged to interconnect their systems by contracting for about 200-megawatts (Mw) of firm transmission service with Idaho Power Co. and the Bonneville Power Administration.

The FERC noted that the two utilities have not proposed single-system electric pricing, and had failed to distinguish the present circumstances from other merger cases in which the FERC required single-system pricing. Nor have they proposed to offer firm transmission service between the two systems, claiming that they will require full use of the 200-Mw transmission path. Also, due to present transmission constraints, transmission service on SPP's system under the proposed tariffs would not be immediately available. The FERC said that the applicants would be unable to use the 200-Mw transmission path until early 1997 when SPP's new 345-kilovolt Alturas transmission line should be ready.

Calling the proposed merger "atypical," the FERC said that three-quarters ($349 million) of the estimated gross merger savings of $497 million in nominal dollars over the period 1996-2005 is related to labor cost reductions. The FERC's preliminary analysis indicated that many of the claimed merger savings were unsubstantiated, and that applicants' analysis of the merger benefits were not stated on a net present value basis.

Commissioner Massey pointed out that the merger as proposed might not meet the FERC's comparability requirements: "The applicants have filed transmission tariffs, but propose not to offer service for several years over the Sierra system or a new line being built between the two companies. In fact, the merger as planned apparently will