Frontlines

Fortnightly Magazine - February 15 2000

How 165 lawyers were mostly on the wrong side in the biggest electric merger to date.

With Warren Buffet buying up MidAmerican Energy as his own personal utility, and Bill Gates taking a stake in Avista, the standard electric merger starts to look tame.

For that and other reasons, I believe it's all but certain that the Federal Energy Regulatory Commission will soon OK the electric industry's biggest-ever merger, combining American Electric Power Co. with Central and South West Corp. Of course, that ruling will come as bad news for many of the 165 lawyers I counted as having appeared on the record in that case.

But it's good news for the AEP lawyers. If they win they get their lives back.

It's been 15 years, or maybe longer, since I first met Lon Bouknight Jr., an electric utility merger specialist now practicing law at Steptoe and Johnson, and one of the lead lawyers on the case representing AEP.

Now understand that Lon is a very intelligent guy - he could probably build his own electric grid with all the knowledge he's soaked up. But handling a utility merger case is pretty demanding. The work never lets up. Some things you don't have time for. You can lose track of real life.

I recall once that we were sitting next to each other at an industry lunch in San Francisco. As the hotel waiters ran between the tables, passing out the coffee and carrot cake, we both turned our chairs to get a better look at FERC chair Elizabeth Moler, our luncheon speaker on that day. She opened with a joke about a story she had seen on TV the night before. It had something to do with bungee jumping. Everyone in the room burst out laughing. Then, as the laughter changed to applause, Lon turned and whispered in my ear.

"Bruce," he asked, "What's bungee jumping?"

That's why I think AEP is sure to win the merger battle.

THE MERGER OPPONENTS WERE DOOMED WHEN THE FERC ISSUED ORDER 2000 in December, and then followed with its purported "conditional approval" of the proposed Alliance transco, of which AEP would be a key member.

First, by deciding that utilities were free to choose to form or join a regional transmission organization (RTO), the commission gave itself no choice but to OK the AEP merger. The company had built its strategy around the Alliance group as an alternative to the Midwest Independent System Operator. Some merger opponents, such as Dayton Power & Light Co., had argued that MISO was better-suited for AEP. But for the FERC to agree would repudiate its stance against mandates.

Then came the Alliance order. By keeping Alliance alive, but telling the five Alliance participants to go back and fix the proposal (relieve rate pancaking; improve board independence; widen geographic scope), the commission foiled the many merger opponents who had questioned AEP's commitment to a qualifying RTO because of those same objections. Those quibbles have now become moot.

Let's pull out the map. With Central and South West added in, the Alliance RTO outflanks MISO on both the east and the west. That means that generators within MISO must wheel through Alliance to reach capacity-short markets in the Northeast, Southeast or Southwest. By contrast, AEP generation would enjoy a straight shot, with one less wheel. That had led MISO to question the testimony of AEP witness Dr. William Hieronymus (PHB Hagler Bailly), on how the merger would not increase concentration in generation markets to the East.

"This point begs the relevant question of whether the Alliance will bar firms to the west of AEP from reaching eastern destination markets." And MISO continued:

"At most locations Alliance is merely one and occasionally two systems thick. Alliance is a wall that isolates the Midwest ISO and southern utilities from PJM, New York and New England."

But Lon Bouknight fired right back, in a brief he filed for AEP:

"The incentive to force AEP into the Midwest ISO is crystal clear. ¼ They [MISO participants] would benefit economically from forcing AEP into the Midwest ISO, because they would then pay lower transmission rates over AEP's system. ¼ [That] would increase [their] profits ¼ from their generation sales to the East.

"What is at stake in this disagreement," added Bouknight, "is the relative margins of the parties on sales of low-cost coal energy into eastern markets, not the health of the competitive process."

The FERC staff sides with AEP. It has put great stock in a stipulation it signed last year with the two merger applicants. In that deal, AEP promised by year-end 2000 (with a possible 75-day extension) to transfer to an approved RTO all of the functions it provides related to transmission service, security and control area operation. Recall how MISO was formed to allow participants to continue to operate their individual control areas. Now observe how the FERC staff seems ever so slightly to favor Alliance over MISO for AEP membership. Here I'm quoting the staff brief filed

on Dec. 28, after the commission had released its RTO

and Alliance orders:

"No other utility in the country has taken this step [transfer of grid functions] in the context of a merger.

Once the transfer is complete, AEP will have no control

over calculating and posting ATC [available transmission capacity], managing the OASIS site, performing congestion management ¼ and other functions that present the potential for manipulation."

The staff observed how an RTO must be "especially vigilant" that transmission customers that continue to operate control areas cannot discriminate against others: "[I]t is important for the RTO that receives AEP's transmission facilities to have control area responsibility."

IF THE FERC MAKES MY PREDICTION COME TRUE, IT WILL EXPOSE A FAILED STRATEGY on the part of Enron, and trade groups like the American Public Power Association (APPA), the Electricity Consumers Resource Council (ELCON) and the National Rural Electric Cooperative Association (NRECA). In essence, those groups have tried to use the merger case to lay collateral attacks against the FERC's rubber-stamp merger policy. APPA and NRECA have repeated calls for a merger moratorium. Enron again opposes the native load preference on transmission capacity.

But give credit where it's due. AEP and CSW have settled with just about any party that might have fought the merger. In November, Commonwealth Edison and Cinergy broke ranks with MISO and withdrew their opposition to the merger. (ComEd now has its hands full defending its proposal of Dec. 13 to form a separate transco within MISO. Many have challenged that move, including old standbys APPA, Enron and ELCON, plus Madison Gas & Electric, Wisconsin Public Service, the state regulators in Wisconsin and Iowa.)

In the AEP case, the latest settlement was filed on Jan. 28. In that deal, AEP and CSW agreed to let the Missouri Public Service Commission seek relief if that state should adopt electric competition several years down the road, and then should discover that the merger interferes with their newly competitive power markets. And consider this: The Missouri PSC didn't even have jurisdiction to review the merger in the first place.

This latest concession drew sarcasm from APPA and NRECA. As they see it, AEP and CSW have "reached into their knapsacks to come up with enough goodies to buy the silence of many customers and competitors."

We'll know soon whether that has worked.


4

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.