by Roger Feldman -- Bingham, Dana L.L.P.
The latest news from the National Power League is the proposed merger of the Bears (Unicom) and the Eagles (Peco): the first of the major inter-urban mergers. Under direction of local politicos, each team had previously released all of their offensive team except a few aging power runners ("nukes" in NPL jargon). Together, with some (na´ve?) British capital, they hope to tear up the League. One problem: the remaining Bears (transmission) line has demonstrably developed holes, and it is not clear how the merger strategy deals with that. (The brownouts after each Cleveland game are terrible.) Which prompts this Redskin bleacher seat observer of power football, to raise the following questions, which are basic to the future of electric regulation:
Some background on the first question: At the beginning of training camp this year, $229 billion of energy mergers had been recorded since last year, and the pace is quickening, as deregulation and convergence have become accepted realities/strategies. Increasingly the pattern seems to be one of consolidation to a smaller number of very large power/fuel combustion players and their musical chairs acquisition of ownership of old assets previously held by companies from other regions. The old guard still own the wires, try to defend their turf and, perhaps, dream of their wires somehow becoming multimedia cables. A few hardy upstarts from the old PURPA Association nimble unregulated subsidiaries of the NPL giants and monster members of the Gashouse Gang provide the competitive marginal cost edge with semi-merchant plants.
Two public policy questions remain for the NPL Board of Directors: will any fans besides large industrial users benefit materially? Will system reliability and price stability be protected or will we have more poster child Unicom blackouts and Cinergy trade burnouts?
Basically the view of Congressional deregulation proponents seems to be that these are structural problems to be resolved by FERC, with some additional powers statutorily vested. Even in the Administration bill, however, the agglomeration governance powers are somewhat sketchy and Republicans (especially Dixiecans) like them a lot less. States rights concerns seem to be wearing down ideas like drop dead dates for State deregulation initiatives.
Which leaves FERC, whose douty leaders seemed prepared to tip toe up to at least the reliability aspect of issues through its RTO NOPR. It does contemplate (though not drop any flags on the field for), mandatory regional regulation; it leaves open the Transco/ISO dispute for private initiative; it contemplates overall measures of regulatory performance standards. But the FERC zebras face two major mega problems and one conceptual problem in taking charge of the game deregulation and avoiding flagrant mergers most foul.
The first is, the merger guidelines it is applying, per its Order No. 888 were prepared by the hoary Walter Camp Playbook of power ball, the Herfindahl-Hirschman Index (HHI). Not only does HHI require complex analysis with substantial data needs, it is very sensitive to assumptions on cost and access, (which, in any case, in this rapidly changing world, are themselves problematic). It is hard to identify what "safe harbor" of merger conduct is or is not appropriate. The playing field can be tilted at the wrong times.
This problem may be made more complicated by the fact that FERCs authority to make calls at all, under certain circumstances, is being challenged, principally by NPL home teams in the name of their fans (their "native load" as they affectionately refer to it). First, Northern States Power ("NSP") successfully challenged FERCs requirement that NSP curtail native load on a comparable basis with firm point-to-point service. The 8th Circuit suggested in that case that aspects of FERCs authority under Order No. 888 which "affected" retail service exceeded its authority. Piling on, Entergy then challenged FERCs interference with its reservation requirements as they affected retail load. VEPCO currently is arguing the need for priority service to its bundled retail and Southern is seeking to vitiate the "comparability" requirements of Order No. 888.
In the absence of Federal legislation, if FERC doesnt have authority, its RTO delegees dont either. If they dont, are their "market areas" good definitions of concentration for merger analysis? Under those circumstances, can the RTO NOPR defitively put an HHI-based analysis on a better footing than it is today?
Perhaps the proper rejoinder to all of this handwringing about acquisitions is a hardy "so what". As the Dutch said to the Gipper (or possibly Edmund Morris): "The business of America is business." The question, which both competitors of "inappropriate" mergers and critics of regulation each should ask, from their own vantage points simply is: Are we creating a marketplace that achieves the service objectives envisaged? This is consumer oriented rather than a corporate strategy oriented question. It is, in fact, the question Professor Joskow of MIT raised in his RTO NOPR comments; in a related but different context: Joskow was concerned whether transmission regulatory reform (specifically excessive ROE allowance) would be used, (inappropriately in his view) to entice reluctant utilities to form and participate in RTOs. The larger question is if consumer protection analysis is deferred to statistical examinations in RTO regions, (formulated on a transmission-driven basis), and effectively centralized at the Federal-delegee level, will the realities of merger impacts be adequately analyzed? Transmission costs, after all, are only a small component of power prices to consumers.
When the Bears and Eagles merge, how will brownout protection at the home fields be enhanced? How will needed transmission lineman be acquired? What policies will be pushed toward favoring native load? Will benefits of multi-regional presence gained by merger be assured by operation of the markets? The free market, on which the new system ultimately will rely, and which ultimately is the most efficient, works only as well as the alignment of private incentives with public interests? Who will be looking at that as the agglomeration/musical chairs trnds further outstrips the conceptual and legal framework of Congress and FERC. Evidently not the NPLs expansion members (EPSA) who recently excoriated those ISOs which intervened this summer when imperfect markets spiked like end zone grandstanders. Their view: "[ISOs] should be indifferent to the price at which the commodity they transport clears the market."
As we begin the new NPL season, lets hope the Leagues Board and its zebras are intelligent in recognizing when a teams merger market move is offside or at least have started developing recommendations for those to whom they pass the responsibility for making the decision (or at least penalizing field position).
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.