There has been a sharp increase in market power in theelectricity market and merger activity is poised to skyrocket withthe spread of electric deregulation, Federal Trade CommissionChairman Robert Pitofsky told the Federal Energy RegulatoryCommission 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 avalanchebut a surge of merger activity with deregulation.”

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

Pitofsky said that although efficiencies are important in adefense of a merger they often are exaggerated. “Efficiencies areeasy to claim and hard to prove,” he said, quoting a former FTCchairman. He cited a case in which the merger candidates keptcoming back with higher efficiency estimates. In the beginning theytold the judge their merger would reduce costs by 4%, but by theirthird visit that figure had jumped to 15%, and the judge ended updisregarding the claims of efficiencies on grounds that they werenot credible. “It was the Pinocchio affect. And I think that’s whatis going to happen in this area [of mergers in the electricindustry].

“We insist on core evidence. The efficiencies really should bein same market in which the anticompetitive effects occur. We oftensee claims in which someone says ‘well if you allow this merger inCalifornia, yes, there will be concentration and perhaps ananticompetitive affect, but the citizens in Nevada, Oregon andWashington will be advantaged.’ I would not dismiss that out ofhand. There may be situations in which the efficiencies in Nevadaare so great, and the anticompetitive affect in California are soslight that you would take them into account. But ordinarily youwould not.

“First of all it’s very difficult to measure cross-marketefficiencies. And more important than that, why should the citizensin California pay a tax to improve the welfare of the citizens inNevada. So by and large, we don’t take cross-border efficienciesinto account but we will listen to those claims and there areexceptional circumstances.”

Rocco Canonica

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