FERC last week put off making a final decision on the merger ofTopeka, KS-based Western Resources Inc. and Kansas City Power &ampLight (KCP&ampL), citing potential competitive concerns. It set theproposed combination of the Midwest electric utilities for anevidentiary hearing on issues involving market power and customerprotection.

Staff said it was unable to reach final conclusions about thecompetitive concerns of the proposed deal, given that much of the”data and assumptions” underlying the partners’ original mergeragreement, which was filed at FERC in September 1997, were outdatedby the time a revised agreement was submitted in August 1998[EC97-56].

Specifically, the staff noted it had questions about theinformation and assumptions used in the merger application’scompetitive screen analysis. Further, staff said it needed”additional information” from merger partners to determine whethercombining their power generation capabilities with interests in gastransportation would give them an edge over competing generators inthe region. The concern is especially heightened considering thatthe transportation facilities operate in the same geographicregions as generators that compete with Western Resources’utilities and KCP&ampL of Kansas City, MO, according to FERC staff.

Western Resources is involved in a strategic alliance with OneokInc., which – in addition to its gas distribution business – owns alarge gas pipeline network in Texas and Oklahoma that hasinterconnections with major interstate facilities. As part of thedeal, Western Resources acquired a 45% interest in Oneok in returnfor turning over its gas assets in Oklahoma and Kansas to thecompany in late 1997.

“Because the applicants’ interest in [Oneok’s] upstream pipelineoperations are located in the same geographic region as theirinterests in downstream generation, we are concerned that themerger may create or enhance the incentive and ability for themerged company to frustrate competing generators’ access to fuelsupplies, thereby exercising market power in generation,” the FERCorder said.

Diana Moss, a senior economist with FERC’s Office of EconomicPolicy (OEP), sees potential competitive problems in the offing.”You’re merging firms that have generation and you’re hooking themup with a company [Oneok]” that has pipeline assets, she said. Thesituation poses a “vertical concern” in the Kansas and Missouripower markets.

“We are not able to determine what the upstream gastransportation market [would look] like in this particular case[post merger] for lack of information” from the merger partners,Moss said. It’s unclear whether competing generators would be ableto access alternate gas transportation facilities, she noted.

Kansas and Missouri regulators also have expressed similarconcerns about the competitive aspects of the proposed merger andhave set the issue for hearing, FERC staff indicated.

Western Resources spokeswoman Robin Lampe dismissed any hintthat FERC’s action might cloud the future of the merger. “I don’tthink that’s that unusual. It would be…unusual if they made adecision this soon.”

Western Resources owns two electric utilities – KPL and KGE -which provide electric service to about 614,000 customers inKansas. KCP&ampL provides electric service to more than 445,000customers in Missouri and Kansas. The utilities are seeking tocombine their operations into a new company – to be named WestarEnergy. The new company would have more than $8 billion in assetsand over 8,000 MWs of electric generation resources.

Susan Parker

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