After months of delay, FERC last week finally issued a notice ofproposed rulemaking in which it seeks to significantly ease theregulatory filing demands for applicants of both horizontal andvertical utility mergers.

The Commission hopes to accomplish this by stripping away thelayers of out-dated filing requirements and by not requiring fullmarket-power analyses for the so-called “easy mergers,” ones thatdon’t raise any major market-power concerns [RM98-4]. This wouldallow for more “timely processing” of utility merger applications,and would provide energy companies with “reasonable predictability”as to how FERC will act on their merger requests, said CommissionerWilliam Massey, who was in charge of the task of reshaping thefiling requirements.

The NOPR “represents a major advance in our effort tosystematize merger review, and to prepare for new developments onmerger and acquisition activity,” said Chairman James Hoecker. “Weneed to maintain our ability to address mergers quickly, sensiblyand effectively.” Although “good policy is important,” he noted”good policy without good implementation is ineffectual.”

Will the streamlined filing rules and potentially faster FERCdecisions encourage more utility mergers in the future, which someelectric industry insiders think could pose a danger to acompetitive market? “I think we will be seeing more mergerapplications over time just because market participants are tryingto position themselves to thrive in this new environment,” Masseynoted. “I don’t know that our NOPR is going to encourage moremergers. I don’t think it will.”

Although the effect of increased merger activity on electriccompetition is a “legitimate concern,” he noted the Commission’sproposed guidelines only would aggravate the situation in the eventthey were to provide for a “less fulsome evaluation of market-powerissues,” which FERC doesn’t plan to do. “We [will] focus like alaser beam on that issue,” Massey said.

“The real danger from mergers is an increase in market power.But if our analysis is appropriately focused on market-powerissues, I think that we can reassure ourselves and the market thatmergers won’t increase market power, while at the same time movingthe cases through the Commission in a timely way.”

While Massey agrees that FERC should be “appropriately cautiousnow with respect to big mergers,” he doesn’t believe that amoratorium on such utility mergers at the Commission is warrantedat this time – an action that has been advocated by the AmericanPublic Power Association and the National Rural ElectricCooperative Association.

Rules for Vertical Mergers

In the NOPR, the Commission for the first time formally proposesan analytical framework for assessing the competitive effects ofvertical (electric-gas) mergers. Although FERC has acted on sevensuch combinations in the past two years, its 1996 policy statementon mergers barely addressed the issue of how to evaluate thesetypes of mergers. As a result, it has been developing policy forvertical mergers on a case-by-case basis.

The NOPR proposes “certain abbreviated filing requirements andlimitations on the scope of our review” of vertical mergers. “Thisshould greatly reduce the number of applications that will requirea complete analysis of the vertical aspects of a proposed mergerinvolving a jurisdictional public utility,” the proposed rulemakingsaid.

A candidate for an abbreviated screening analysis would be aproposed merger where one of the partners, such as a gas supplier,would sell either a small amount or no gas at all into thedownstream generation market of its utility merger partner,according to the NOPR. Vertical mergers that can show they poselittle competitive threat in the initial review won’t have toendure a further, more detailed market analysis, resulting in an”expeditious processing” of such mergers. Those that fail, however,will be subjected to a more rigorous review and will be required tosubmit additional market data.

FERC proposes to adopt this strategy with all mergers, whethervertical or horizontal, where the threat to competition is minimal.It took this approach in the Duke-PanEnergy merger, concluding thecombination would have a “negligible effect” on marketconcentration because of the distance between the companies’ energymarkets.

The fear with any merger, whether it be horizontal or vertical,is that it will disrupt competition through higher prices orreduced output, the NOPR noted. “Horizontal mergers can cause thisby eliminating a competitor from the market and by the exercise ofmarket power by the merged firm.” Vertical mergers, on the otherhand, have the opportunity to cause this by giving a competitiveedge to their downstream electric affiliates via lower pricesand/or greater supply.

In a companion order to the NOPR, the Commission seeks industrycomments and has called for a public conference to be held todiscuss the use of computer modeling in conducting merger analysis[PL98-6]. “It is not yet a panacea, but it certainly is animportant first step in facilitating our market analysis andstandardizing everyone’s assumptions about how power markets work,”Hoecker said.

Susan Parker

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