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Mega AEP-CSW Merger on Hold

Mega AEP-CSW Merger on Hold

The proposed merger of electric powerhouse American Electric Power (AEP), which also owns the midstream gas assets formerly held by Equitable Resources, and Central and Southwest Corp. (CSW) was placed on hold last week, as FERC set the case for an evidentiary hearing, saying "sufficient concerns" had been raised about potential market power in both the transmission and generation arenas.

"This is a combination of two very large utilities that own substantial transmission facilities. AEP [alone] owns about 22% of all transmission at or above 230 kV in the eastern interconnection," which has led some critics to suggest that the merged company could "foreclose competition through, for example, manipulation of transfer capability," said Commissioner William Massey.

Opponents of the proposed merger "also point out that the geography of these systems matters. The location of the applicants - one in ECAR and the other in SPP and ECAR and ERCOT - may give them an incentive and the ability through the use of their transmission system to foreclose competitors from selling into the CSW electricity market, and thereby raising wholesale electric prices," he noted.

In addition, concerns have been raised that the location of strategically placed generation capacity could give rise to AEP-CSW market power over transmission, Massey said. "By dispatching generation in a particular way, transmission may not be available to other competitors who would want to sell into their combined markets." In short, critics fear that AEP-CSW "can use the concentrated upstream market to raise electricity prices in the downstream wholesale power market."

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

Commissioner Vicky Bailey dismissed any hint that the proposed AEP-CSW merger, simply because of its size, may have undergone tougher scrutiny at the Commission. ":..[W]e are not diverging from our standard analysis because of the size or location of the applicants. Nor are we holding the applicants to a higher standard because of the current absence of an ISO or any regional structures in AEP's service territory."

In fact, "I am encouraged by the recently announced proposal of AEP, FirstEnergy and Virginia Power to create their own regional transmission as early as March of next year," she said at the bi-weekly FERC meeting.

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

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

Susan Parker

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