The $6 billion marriage of American Electric Power (AEP) andCentral and South West Corp. (CSW) got the go-ahead from FERCyesterday, but not before the Commission placed some conditions onthe transaction.

By a vote of 3 to 1, with Commissioner Curt Hebert Jr.dissenting, the Commission majority conditioned its approval on themerged utility transferring operational control of its transmissionfacilities to a FERC-approved regional transmission organization(RTO) by Dec. 15, 2001. AEP and CSW would be allowed to close theirmerger prior to joining an RTO, FERC said, but in the interim theywould have to implement certain mitigation measures. These wouldinclude hiring an independent party to calculate/post availabletransmission capacity and monitor the operation of the transmissionsystem to determine whether the merged utility is discriminatingagainst customers or exercising market power.

The decision further requires the merged company to divest itsownership interests in 550 MW of generating capacity at twofacilities in Texas and Oklahoma. AEP and CSW already agreed tothis condition in order to minimize market-power concerns.

“We’re very pleased that we do have FERC’s approval,” said AEPspokesman Pat Hemlepp. “On the surface, from what we heard duringthe meeting, it appears the conditions placed on the merger areones we will be able to address.”

The Commission had no other choice than to impose theseconditions on the AEP-CSW marriage, Chairman James Hoecker said. Ifever there was a utility merger to “raise eyebrows,” this was theone, he noted.

The marriage of AEP of Columbus, OH, and Dallas-based CSW willcreate either the biggest investor-owned utility or the secondbiggest in terms of customer base next to Pacific Gas and Electric(PG&E), according to estimates of energy analysts. The combinedutility company will have an “enormous transmission backbone,”38,000 MW of generation capacity, about 4.7 million electriccustomers in the U.S. and 4 million gas/electric users outside ofthe country.

AEP has seven operating utility subsidiaries, includingAppalachian Power Co., Columbus Southern Power Co., IndianaMichigan Power Co., Kentucky Power Co., Kingsport Power Co., OhioPower Co., and Wheeling Power Co. CSW has four utilities: CentralPower and Light Co., Public Service Company of Oklahoma,Southwestern Electric Power Co. and West Texas Utilities.

The geographic market of the merged company will span fromCanada to Mexico. The territory will cover 11 states, includingOhio, Indiana, Michigan, West Virginia, Virginia, Tennessee,Kentucky, Oklahoma, Louisiana and Arkansas.

The merged utility, which will be called American ElectricCompany, will have a combined market capitalization of about $6.9billion. Hemlepp said AEP and CSW hope to close the transaction,which still is awaiting the approval of the Securities and ExchangeCommission, sometime this spring. They estimate that savings fromthe merger will be about $2 billion over a 10-year period.

Primarily because of the size of the proposed merger, Hoeckersaid the Commission couldn’t “stand mute” on the deal. “I thinkthat the burden here is not ours, it’s the [merger] applicants. Andthe applicants haven’t met it entirely. There appears to be astrong potential for the exercise of vertical market power.”

In the end, however, he believes “this merger and the RTO thatwill result from it, or RTOs, will be a positive step in ourpursuit of a competitive market.” It will be “a win-win for theapplicants and for the marketplace.”

Hebert dissented from the majority on two grounds. First, hedoesn’t think the Commission should review utility mergers anymore.This order “should once and for all end the debate” over thisissue. “…..Congress should remove us from the merger business.”Secondly, he believes the majority saw market-power problems wherenone existed. “Our claimed expertise leads…..[the] majority toinvent market power out of thin air.”

Hebert further called the FERC majority’s decision “an emptygesture in practical terms,” given that the merging utilitiesalready are “trying very hard to join an RTO.” The order evenpoints this out, he said.

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