The proposed merger of electric powerhouse American ElectricPower (AEP), which also owns the midstream gas assets formerly heldby Equitable Resources, and Central and Southwest Corp. (CSW) wasplaced on hold last week, as FERC set the case for an evidentiaryhearing, saying “sufficient concerns” had been raised aboutpotential market power in both the transmission and generationarenas.

“This is a combination of two very large utilities that ownsubstantial transmission facilities. AEP [alone] owns about 22% ofall transmission at or above 230 kV in the easterninterconnection,” which has led some critics to suggest that themerged company could “foreclose competition through, for example,manipulation of transfer capability,” said Commissioner WilliamMassey.

Opponents of the proposed merger “also point out that thegeography of these systems matters. The location of the applicants- one in ECAR and the other in SPP and ECAR and ERCOT – may givethem an incentive and the ability through the use of theirtransmission system to foreclose competitors from selling into theCSW electricity market, and thereby raising wholesale electricprices,” he noted.

In addition, concerns have been raised that the location ofstrategically placed generation capacity could give rise to AEP-CSWmarket power over transmission, Massey said. “By dispatchinggeneration in a particular way, transmission may not be availableto other competitors who would want to sell into their combinedmarkets.” In short, critics fear that AEP-CSW “can use theconcentrated upstream market to raise electricity prices in thedownstream wholesale power market.”

AEP and CSW have proposed steps to mitigate potential marketpower arising from the merger, such as the sale of 320 MWs ofgeneration capacity on a short-term basis, but opponents doubt thatthis would be effective since the merger partners still wouldmaintain control over the capacity. They also have questioned otherproposed mitigation measures. The Commission directed that anadministrative law judge convene a hearing within two weeks of theorder to explore these and other competition-related issues.

Commissioner Vicky Bailey dismissed any hint that the proposedAEP-CSW merger, simply because of its size, may have undergonetougher scrutiny at the Commission. “:..[W]e are not diverging fromour standard analysis because of the size or location of theapplicants. Nor are we holding the applicants to a higher standardbecause of the current absence of an ISO or any regional structuresin AEP’s service territory.”

In fact, “I am encouraged by the recently announced proposal ofAEP, FirstEnergy and Virginia Power to create their own regionaltransmission entity…by as early as March of next year,” she saidat the bi-weekly FERC meeting.

Columbus, OH-based AEP would be the surviving company in theevent the merger is approved by the Commission. AEP, a registeredpublic holding company, owns seven electric utilities: AppalachianPower, Columbus Southern Power, Indiana Michigan Power, KentuckyPower, Kingsport Power, Ohio Power and Wheeling Power. It has 38power plants with generation capacity of 23,800 MWs, and 119,000miles of transmission and distribution lines. Its AEP Resourcessubsidiary purchased in September the midstream operations ofEquitable Resources, principally the Louisiana Intrastate Gassystem, for $320 million in cash.

Dallas, TX-based CSW, also a registered public holding company,owns four electric utilities: Central Power and Light, PublicService Company of Oklahoma, Southwestern Electric Power Co.(SWEPCO), and West Texas Utilities. The utilities serve about 1.7million customers in Arkansas, Louisiana, Oklahoma and Texas. CSWalso owns substantial generation and transmission assets.

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.