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FTC Chair Vows Close Scrutiny of Merger Efficiency Claims

FTC Chair Vows Close Scrutiny of Merger Efficiency Claims

There has been a sharp increase in market power in the electricity market and merger activity is poised to skyrocket with the spread of electric deregulation, Federal Trade Commission Chairman Robert Pitofsky told the Federal Energy Regulatory Commission last week.

"The numbers I have [show] that the top 10 firms that held 33% of the market in 1992 are up to 51%, the top 20 firms are over 72%, and if history is any guide, we are going to get not an avalanche but a surge of merger activity with deregulation."

Pitofsky vowed that the FTC will continue to scrutinize these mergers closely, particularly when it comes to efficiency claims. The issue that has created some of the most difficult problems for FTC and for the courts has to do with efficiency claims by merger candidates, he said. Merger candidates often claim that although their merger will cause a modest increase in market power it will be an efficient merger, and the efficiencies ultimately will be passed on to consumers.

Pitofsky said that although efficiencies are important in a defense of a merger they often are exaggerated. "Efficiencies are easy to claim and hard to prove," he said, quoting a former FTC chairman. He cited a case in which the merger candidates kept coming back with higher efficiency estimates. In the beginning they told the judge their merger would reduce costs by 4%, but by their third visit that figure had jumped to 15%, and the judge ended up disregarding the claims of efficiencies on grounds that they were not credible. "It was the Pinocchio affect. And I think that's what is going to happen in this area [of mergers in the electric industry].

"We insist on core evidence. The efficiencies really should be in same market in which the anticompetitive effects occur. We often see claims in which someone says 'well if you allow this merger in California, yes, there will be concentration and perhaps an anticompetitive affect, but the citizens in Nevada, Oregon and Washington will be advantaged.' I would not dismiss that out of hand. There may be situations in which the efficiencies in Nevada are so great, and the anticompetitive affect in California are so slight that you would take them into account. But ordinarily you would not.

"First of all it's very difficult to measure cross-market efficiencies. And more important than that, why should the citizens in California pay a tax to improve the welfare of the citizens in Nevada. So by and large, we don't take cross-border efficiencies into account but we will listen to those claims and there are exceptional circumstances."

Rocco Canonica

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