The pending merger between Constellation Energy Group and FPL Group does not raise competitive concerns, a consultant said in recent testimony filed at FERC. William Hieronymus, a vice president of CRA International Inc., said that there is "relatively small" competitive overlap between the two companies and urged the Commission to approve the merger [EC06-77].
In his Feb. 17 testimony, Hieronymus noted that he was asked by counsel for FPL Group and Constellation to evaluate the potential competitive impact on electricity markets of the merger of the two companies.
The consultant said that the horizontal effect of the merger, resulting from the combination of generation, is small and that the only material overlap is in PJM, "and even there, it is not problematic."
Hieronymus said that although both companies have a significant amount of affiliated generation throughout the U.S., "there are few geographic markets in which both own material amounts of generation and none in which applicants have a significant share post-merger."
He said that while North American Electric Reliability Council (NERC) regions and regional transmission organizations (RTOs) are not necessarily relevant markets for analysis purposes, the overlap of Constellation's and FPL Group's generation and their post-merger market shares "are not materially larger in any potentially relevant market contained in these RTOs and NERC regions."
Hieronymus said that under any appropriate relevant geographic market definitions, combining the generation assets of FPL Group and Constellation "has a relatively small effect on market concentration, and hence the merger does not raise competitive concerns."
He noted that about 60% of FPL Group's generation consists of Florida Power & Light-owned generation located in the Florida Reliability Coordinating Council (FRCC) within the Florida Power & Light control area. The nearest generation in the Eastern Interconnection owned by Constellation is a 250 MW gas-fired peaking facility located in Virginia about 750 miles away.
According to the testimony, the largest overlap of the utilities' generation is in the control area of PJM Interconnection, where FPL Group owns or controls about 2,000 MW of generation and Constellation owns about 7,300 MW of generation and controls an additional 1,500 MW of generation through long-term agreements.
However, PJM overall has in excess of 160,000 MW of generation, and the combination of FPL Group's 1% market share and Constellation's 6% market share "has an immaterial effect on market concentration," Hieronymus said.
Most of Constellation's generation, but only about half of FPL Group's generation, is located in the original PJM footprint, he noted. Hieronymus said he examined the PJM market and potentially relevant sub-markets in more detail, conducting a competitive analysis screen to demonstrate that the change in the Herfindahl-Hirschman Index (HHI) "is well below the thresholds that indicate any competitive concern."
The consultant also said that the merger raises no horizontal issues in markets outside of PJM. "While the merging parties each own or control affiliated generation outside of PJM, the extent of the generation controlled by the smaller entity in markets where both own generation is de minimis so that the effect of the merger necessarily is similarly de minimis."
Meanwhile, Hieronymus said that the merger creates no vertical market power issues. "There are no issues related either to transmission ownership and operation, or to the combination of electric generation assets and fuels supplies or fuels delivery systems."
With respect to transmission ownership and operation, the merger creates no incremental opportunities for Constellation or FPL Group to exercise market power, he said. "In other words, there is no increase in the incentive or ability to exercise vertical (transmission-generation) market power relating to this transaction."
Hieronymus noted that the Baltimore Gas and Electric Co. electric transmission systems are controlled by PJM. Florida Power & Light's transmission in Florida is subject to an open access transmission tariff (OATT) and Constellation does not control any generation served by Florida Power & Light's transmission or that can meaningfully compete in the market area in which Florida Power & Light's transmission is located.
These conclusions are the same for FPL Group's single transmission asset located in ISO New England (ISO-NE), the Seabrook substation, which is controlled by ISO-NE and also is subject in part to the ISO-NE OATT and in part to a local network service tariff that is on file with the Commission.
Switching gears, the consultant said that a lack of competitive harm in wholesale markets is also important from a retail perspective. "Competitive retail markets rely on procurement of power from a competitive wholesale market, and, thus it is important from an ultimate customer perspective that the merger not increase market power in wholesale markets, which I have already demonstrated."
In addition, "there is limited competition between applicants in most retail markets and there are no concerns raised by the elimination of a competitor in retail markets."
While Constellation has a relatively strong retail marketing presence (with 15,500 MW of competitive retail supply peak load), FPL Group is a relatively minor participant (with only about 1,200 MW of competitive retail supply peak load), Hieronymus said.
"While both applicants are participants in the Texas/ERCOT market, there are no competitive concerns," he added. Constellation and FPL Group's combined share of the retail market in Texas is less than 9% and the combination of their shares implies an HHI change of only 24 points, according to the testimony. "In New England, FPL Group clearly is a very minor participant and in no way uniquely positioned as a potential supplier."
The consultant said that any concerns about elimination of an actual or potential competitor are mooted by the ease of entry and the large number of competitors in relevant markets. "FPL Group is a relatively minor participant in each of the markets in which they participate. FPL Group is not licensed to sell electricity at retail in any PJM market, and there are a large number of licensed suppliers in Maryland. Florida has no retail access, so there is no concern about Constellation competing in Florida. In Texas, where both applicants participate, there are a large number of competitive retail suppliers, as is also the case in the active direct access retail markets in New England, i.e., Maine and Massachusetts. Thus, there are no competitive concerns in retail electricity markets resulting from the merger."
Hieronymus recommended that FERC find that the proposed transaction will not adversely affect competition and approve the merger.
CRA International was formerly known as Charles River Associates.
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