merger proceedings that work: a look to the future

Doug Green is a partner in the Washington, D.C. firm of Newman &

Holtzinger, where his practice involves antitrust matters and

commercial litigation for energy companies. Mr. Green has

represented Northeast Utilities Co. and Southern California Edison Co.

in their recent FERC merger proceedings, and was involved in

formulating competition issues for intervenors in the PacifiCorp merger case. He has also represented Public

Service Electric and Gas Co. and Houston Lighting & Power Co. in

major commercial litigation matters. Mr. Green received a J.D. from

Georgetown University Law School where he was an editor

of the law journal.

Merger Proceedings That Work: A Look to the Future Both consumers and the economy in general would benefit from consummation of electric utility mergers that yield efficiencies. To permit this, the merger approval process itself must become more efficient.

Douglas G. Green

l 'n 1987 industry analysts fore- .saw a wave of electric utility

consolidations that would reduce the number of major utilities from

"150 to 50 in five years." Now, as that five year milestone nears,

and in the wake of California

regulators' rejection of the proposed merger between Southern California Edison Company ("Edi-

son") and San Diego Gas & Elec- tric Company ("SDG&E'), The

New York Times recently featured an article proclaiming: "Era of Utility Deals Fails to Arrive. ''~

What does the future hold for

electric utility mergers? What are the implications of the regulatory complexities and major political opposition encountered by the Ed- ison/SDG&E and Kansas Power & Light Company ("KP&L")/

Kansas Gas & Electric Company ("KG&E") mergers? Can anti-

trust and transmission access issues be dealt with effectively in

electric utility merger proceedings? Will the Federal Energy

Regulatory Commission issue guidelines to simplify these pro-

ceedings? While no one can provide the

definitive answer to these ques- tions - - some of which may be re-

solved by the FERC's decision in the Northeast Utilities/Public Ser- vice of New Hampshire acquisi- tion, expected to be issued about the time this article is published - - the shape of the future is suffi- ciently distinct that its contours can be sketched with some confi-

dence.

20 The Electricity Journal

I. Taking Stock of the Merger Movement

A. The Impetus For Consolidations Remains Powerful

The same considerations that

led industry analysts to predict a

wave of consolidations persist,

and there are good reasons to think that meritorious mergers

will be identified and proposed in the next several years.

The structure of the electric utility industry remains largely un-

changed from its status 50 years ago, while other regulated areas

of the economy have experienced substantial structural reorganiza-

tions. Deep down, I suspect no one truly believes that the electric

utility sector - - unlike other infra- structure industries - - achieved the optimal struc~xre a half cen- tury ago, never to change.

In today's global econom)~ the United States can ill afford to hob-

ble the efficiency of an industry so essential to its productivity. Fur-

thermore, with the emergence of a strong nonutility generation in-

dustry, pressure from industrial customers for bypass, and de-

mands from power producers, customers, and power brokers for transmission access, it is evident that utilities possessing a diver-

sity of management, financial, and technological resources will have the best chances for success in the coming years. Electric utility mergers provide the potential for substantial cost-savings, 2

higher quality service, and other benefits that are important in an increasingly competitive world.

B. Factors That Have Impeded Some Consolidations Are Substantial, but Can Be Addressed Strategically

Three major unexpected factors have decreased the merger mo- mentum perceived in the late

1980s. First, local political opposi-

tion that has arisen in some in- stances, with the Edison/SDG&E

merger the prime example, has been both active and potent.

Various interests have chal- lenged the proposition that lower

rates and better service necessar- ily matter in assessing merger ap-

In today's global economy, the United States can ill afford to hobble the efficiency of an industry so essential to its productivity.

plications. These interests have re-

sisted mergers on parochial

grounds, attacking them for being pro-efficiency. For example, in

both the Kansas and California mergers, the applicants intro- duced evidence demonstrating hundreds of millions of dollars in labor savings benefits. State regulatory staff in the KP&L/KG&E merger and various intervenor groups in the Edison/SDG&E case argued that such economies

should be counted not as merger

benefits, but rather as de t r imen t s - -

on the theory that franchised utili-

ties have an obligation not to reduce local jobs. During oral

argument the California regulators expressed puzzlement with

this contention, since all of the

projected labor savings there involved attrition, with no employ-

ees to be laid off. The representa-

tive for organized labor explained that when his young daughter

grows up he hopes she can be an accountant for the electric com-

pany, and that reducing the number of accountants carried on the

payroll diminishes her chances.

S uch arguments bring to

mind the Luddites who in Victorian times rioted against the

coming of the machine age. Yet these arguments illustrate that at the state level, at least, the likelihood exists that utility mergers

will be opposed by some on what are essentially emotional grounds.

Where such grounds are given credence, the task of convincing

regulators that a particular consolidation is in the public interest be-

comes much harden The above factors tend to pro-

tract approval proceedings and to expose merger proposals to the vi-

cissitudes of time. In the unregulated world, few mergers are vul-

nerable for so long to the sensitivity of financial markets or to the fickle winds of politics. Utility mergers can withstand a measure of both; but the longer the process, the greater the chances of unexpected reverses.

While none of these factors can be eliminated, it is apparent that

July 1991 21

there are courses by which they can be reasonably addressed. Re- cent experience shows that these

factors come into play most nega- tively where a proposed merger is

hostile rather than friendly. This was true in Kansas, where the

takeover of KG&E was initially

proposed by Kansas City Power & Light Co. in a hostile fashion.

The Edison/SDG&E proposal, too, through ultimately accepted by SDG&E's Board of Directors,

had all the trappings of a hostile

takeover, since SDG&E had "put

itself in play" via its announced merger agreement with Tucson Electric Power Company. 3 In a

"hostile" context, potentially vola-

tile groups with parochial interests tend to be galvanized into un-

friendly action. The result is proliferation of issues and much

higher transaction costs.

W rhere the merger is

friendly, the opportunity exists at the outset to maximize

the degree of consensus among state regulators, antitrust enforce-

ment agencies, and potentially in- terested parties. The Northeast

Utilities case represents an example of such efforts, albeit in an un-

usual situation. The specter of out-of-control

transaction costs (coupled with uncertain results) represents per-

haps the principal deterrent to prospective consolidations. While any large utility merger will result in significant costs, recent experience indicates that keeping the merger friendly and resolving as many matters as possible with state regulators at the

threshold can provide an accept- able means of cost control.

C. The Edison/SDG&E Experience Appears To Be Sui

Generis

As its echoes begin to fade

awa)~ the Edison/SDG&E experience appears to be largely sui gene-

sis. A number of unique factors

coalesced there at once: • unexpectedly strong local po-

litical opposition to the merger by

the City of San Diego and the Copley Press who perceived the

In the unregulated world, few mergers are vulnerable for so long

to the sensitivity of financial markets or to

the fickle winds of politics.

proposal as part of the creeping "Los Angelesization" of their mu-

nicipality; • the decision by the then Attor-

ney General of California to run against the merger as a central

theme of his campaign for the Democratic gubernatorial nomina-

tion; • the passage of an extraordi-

nary statute by the California legislature applying a stricter standard to the Edison/SDG&E merger than would have applied under existing state and federal

laws concerning competition and merger benefits;

• and a turnover in the compo-

sition of the California Public Util- ities Commission.

The uniqueness of California as a regulatory and cultural venue

also was a distinguishing feature. The significance of the Edi-

son/SDG&E decision, at least at present, appears to be that it may embolden other state Commis- sions to take a harder look at

merger proposals, and some of its language and reasoning may pro-

vide a "litigant's wishing well" for future merger opponents in

other forums. In the long run, its significance may be a function of

the fate of other mergers now pending. If both the KP&L / KG&E and Northeast Utilities

transactions are approved with- out reference to it, the Edi-

SOn/SDG&E decision is likely to

be viewed as a special case. If state regulators kill the Kansas

proposal, the hurdle of state proceedings may loom still higher.

At the moment, if there is any clear general lesson in the Edi-

SOn/SDG&E case, it is that the more hostile and politically charged a utility merger proposal, the greater the risk that the

ground rules will change during its pendency.

II. Antitrust and the Dynamics of the Regulatory Process

Transmission access, and antitrust issues generally, remain focal points of electric utility merger proceedings, particularly before the FERC. Ideally, one sharply de-


fines the antitrust issues involved

in a utility merger at the outset.

The case can then be shaped so

that those issues are clearly focused and do not get confused

with other issues requiring regula-

tory scrutiny. In the course of this

effort, steps can be taken to antici-

pate and address any concerns

which the Department of Justice

might raise in the course of its re-

view under the Hart-Scott-Rodino

merger r e v i e w process . 4

W here the antitrust issues

are clearly delineated

and the evidence fully developed

at an early stage, the competit ion

issues ordinarily can be ad-

dressed and resolved in a way

that facilitates consummat ion of

an otherwise beneficial merger.

This can be accomplished either

through formulating merger-re-

lated commitments that dispel

any legitimate competit ion con-

cern or by developing a case

showing in simple terms that the

merger does not change competi-

tive conditions adversel~ or by a

combination of both approaches. 5

In the dynamics of the regula-

tory process, however, the central goals of antitrust can become ob-

scured. This is ironic because

proper antitrust enforcement is

supposed to achieve the same ob- jective as properly-focused eco-

nomic regulation - - lower prices

to consumers and increased consumer welfare. 6 The antitrust

laws protect against mergers that

create ou tput restrictions and thereby raise prices to consumers

- - i.e., yield "enhanced market power. ''7 Merger cases thus are

supposed to focus on the changes

in competitive opportunities, and

whether there is a resulting effect

on output and prices caused by

the merger. A merger proposal that im-

proves rather than diminishes competitive opportunities for

transmission service does not en-

hance market power by dint of

control over transmission facili-

ties. It should not occasion a de-

bate about the optimal way to use

transmission in the industry,

which is at bot tom a policy issue,

not an antitrust merger question.

Merger intervenors have resurrected antitrust theories coined in William Jennings Bryan's era and interred by the courts decades ago.

The perfect should not be an

enemy of the good.

In electric utility merger cases,

these principles tend to get ob-

scured in three ways. First, the

process encourages utilities that

deal with the merging firms to in-

tervene and to demand, in the

name of "antitrust," transmission

concessions and preferences unre- lated to any competitive impact of

the merger. In regulatory merger-

approval proceedings, unlike federal court proceedings, all inter- ested parties are allowed to

participate whether or not they

can establish an antitrust injury

from the merger. To date this has

meant that virtually every utility

having an actual or potential com-

mercial relationship with either of

the merging parties may inter-

vene and raise antitrust conten-

tions before regulatory tribunals

not used to assessing antitrust

claims and more accustomed to

compromising economic disputes

in rate cases. It is a great

challenge, in this context, for the

regulator to distinguish between

genuine antitrust issues and those that are spurious. Indeed, interve-

nors, seeking to benefit from the

dynamics of the process, have res-

urrected antitrust theories coined

in William Jennings Bryan's era

and interred by the courts de-

cades ago as being at war with

sound law and economic policy.

For example, there is a tendency

for any firm which is a customer

or a supplier of one of the merg-

ing firms to charge that the

merger "lessens competition" by

the mere fact that it removes the acquired company from the mar-

ketplace. But the mere elimina-

tion of actual or potential rivalry

alone does not raise valid anti-

trust concerns. The Supreme

Court flatly rejected precisely this

notion years ago, holding that the

antitrust laws "protect competition, not competitors. ''8 The pur-

pose of antitrust is not to perpetu- ate a particular number of rivals, but to foster consumer welfare. 9

The proper antitrust inquiry thus

is not whether a merger elimi-

nates one of the merging firms as

an independent competitor - - all

July 1991 23

mergers do this - - but rather whether it "obstructs the achieve- ment of competition's basic goals

- - lower prices, better products, and more efficient production

methods. "1° a second potential source of

confusion in electric utility merger proceedings is that regula-

tory policy preferences are often garbed in antitrust clothes. For ex-

ample, everyone agrees that access to scarce facilities controlled

by regulated companies should be made available to their compet-

itors on a reasonable basis. The disagreement is over precisely

what terms are "reasonable." The antitrust laws provide one answer

to this question. But the answer provided by the antitrust laws - -

which give the owner of a scarce

facility the right to use that facility to serve its customers efficiently - - may not be the answer preferred

by regulatory policy makers} 1 For instance, the FERC Transmis-

sion Task Force Report essentially

advocates that the transmission

conditions imposed by the FERC

in the PacifiCorp case be imposed upon the industry generally. But the antitrust laws do not support

such a rule, and as the FERC's

own decisions in the PacifiCorp case make plain, its imposition in merger cases on a generic basis would offend fundamental legal principles that require merger remedies to be tailored to the specific facts at hand} 2

It is important to separate proposed "conditions" impelled by regulatory policy preferences from those actually required by

antitrust imperatives. What is

proper policy varies according to the eye of the beholder. Indeed, some economists argue that any

attempt to impose a regulatory

policy solution will ineluctably be counter-productive. Whatever one's philosophy on regulatory in-

terventionism, when regulatory policy gets mistaken for antitrust

principles, the only sure result is confusion.

The third source of confusion arises from the fact that in electric

utility merger cases the parochial or chauvinistic interests of various

When regulatory policy gets mistaken

for antitrust principles, the only

sure result is confusion.

constituencies will be voiced.

Some of these parties tend to cast their arguments in antitrust terms

when they are really political po- lemics. It is the task of regulators to insulate themselves from the desideratum of such parties and to apply judgment to the merits of a case. The best way to facilitate this, again, is to keep the actual antitrust issues distinct from the pu- tative ones. When the antitrust issues are clearly delineated and properly focused, regulators can

accurately evaluate a merger proposal on its merits.

III. FERC: Teaching Old Dogma New Tricks

As noted above, under existing law, the FERC does not have the authority to prescribe generic merger commitments in the form

of binding requirements. But it arguably could identify in the form

of "guidelines" transmission commitments that, if accepted, would

shift the burden of proof to intervenors to show that they are insuf-

ficient to resolve competitive is-

sues. The existing Department of Jus-

tice Merger Guidelines were nei-

ther designed nor intended for ap- plication in highly regulated,

vertically-integrated industries, much less those having native

load service obligations. It is yet unclear whether the FERC will

issue specific guidelines tailored to resolution of competition and

transmission issues in electric utility mergers. However, it is appar-

ent that further guidance from the FERC could be beneficial. In-

deed, a major reason why FERC merger proceedings have been protracted is that they have served as a forum to play out the transmission policy debate.

Tension arises, however, because the "guidelines" that would be supportable under the antitrust laws may not go as far as the FERC would like to move policy.

Much of the debate in recent FERC cases has concerned two related issues: (1) whether the merging companies should be stripped of native load priority in


the use of their transmission sys-

tem; and (2) whether the merging companies should lose the right

to use their transmission system for coordination transactions if en- vironmental or other unavoidable constraints make it impossible for

them to build new facilities to accommodate other utilities' de-

mands for transmission service.

In the PacifiCorp case, the FERC imposed conditions establishing the latter result. In the Northeast Utilities merger proceeding, 13 the

FERC litigation staff has argued

for a variation of the former. The merit of such conditions in indi-

vidual cases is subject to great con- troversy. However, it is beyond

question that neither can be le- gally justified as a generic pre-

scription for all mergers.

N 'or could the sort of condi-

tions currently being imposed by the FERC in its market- based pricing cases be supported as generic "merger" requirements

under the law. As illustrated by the Terra Comfort decision, the

trend of these cases is to require the applicant for market-based

pricing to "open" its transmission lines unless it can show a total ab-

sence of market power, i.e., that there is no prospect that a potentially lower cost seller might seek access over applicant's facilities. 14

Whatever the merit of a "perfect competition" standard in the context of market-based pricing (and it is not clear that the Commission espouses that criterion), such a standard is completely invalid in

merger cases. In market-based pricing cases, since the applicant is seeking freedom from regula-

tion, it is appropriate for the Com-

mission to focus on the extent of

applicant's existing market

power. Where two utilities seek to merge, however, the standard

is not whether any market power exists, but whether such power is

increased by the merger. Accord- ingl)~ whether or not a standard

that focuses on assuring access to all potential sellers can be justified

by the broad discretion that the

Whatever the merit of a "perfect competition" standard in the context of market-based pricing, such a standard is completely invalid in merger cases.

Commission may possess when

regulating wholesale rates, it can-

not pass muster as a valid applica-

tion of antitrust policy in a merger case.

Under traditional antitrust law, the appropriate guidelines in elec-

tric utility antitrust cases would be much less sweeping. The FERC's recent competition juris- prudence identifies two potential sources of "enhanced market power" resulting from a merger:

(1) control of transmission and (2) control of generation.

As noted earlier, so long as

transmission access after a merger

is at least equally favorable as be-

fore, no "enhanced" market power is created by control of

transmission assets. Hence, a commitment to wheel if capacity

is available, and to build incre-

mental facilities to accommodate

wheeling where it is not, would provide a reasonable "guideline"

under conventional antitrust law for merger-related transmission

commitments.

S o far as generation is con-

cerned, the Supreme Court has deemed a 30% market share

the threshold for establishing a case of significant market power) s

Accordingl}~ the FERC could indi- cate by way of straight-forward

guidelines that any firm which ac- cepts the transmission commit-

ment described above and which, after the merger, will possess less

than a 30% share of delivered bulk power sales in a region has

made a prima facie showing of no enhanced market power. 16

On the other hand, proponents

of more open transmission access argue that any such guidelines should go beyond existing law.

Because one of the overriding concerns with the merger approval

process is uncertaintyF they argue that the FERC should articu-

late "guidelines" that impose a strict enough standard for open

access to eliminate any substantial likelihood that an intervenor would be able to show that acceptance of such commitments is in-

sufficient. By this logic, if voluntary acceptance of such commitments "shifts the burden" to

July 1991 25

intervenors, it will simplify merger proceedings and further an open access agenda. However, such an approach runs headlong into the Commission's prior rul- ings that it cannot impose generic "open" access requirements by merger-related regulatory fiat. A possible solution is guidelines adopting a middle ground between the two approaches dis- cussed above.

I n all events, a maelstrom of .forces now surrounds the

transmission access debate, in- cluding federal legislative efforts, the FERC's recent requests for comments on the electric industr~ and the pendency of the Northeast

Utilities decision. TM As these forces play out over the coming months, we can expect the situation re- garding the likely treatment of transmission issues in merger cases to clarify.

IV. Conclusion

The prediction of massive electric utility consolidation forecast by some financial analysts several years ago has now been eclipsed by other analysts questioning whether any major consolidations can survive the regulatory gaunt- let.

It is highly probable that addi- tional meritorious electric utility mergers will be identified. As indicated above, while the obstacles are quite significant, there are also reasons to think that some mergers will be successfully managed and consummated. Events in the relatively near future should illuminate these issues. •

Footnotes

1. New York Times, May 16, 1991, at D-l, D-4.

2. Pacificorp recently announced that its actual annual merger-related savings exceed its projections, reaching $90 million (as compared to a projected $70 million). Electric Utility Week, March 4, 1991 at 9.

3. Prior to SDG&E's Board accepting the merger proposal, Edison had begun purchasing SDG&E stock and seeking its shareholder lists, a hostile strategy against which SDG&E com- plained at the FERC. FERC Docket No. EL89-1-000.

4. Under this process, which requires pre-merger notification in order to permit an antitrust review by the federal

enforcement agencies, electric utility mergers have been subject to careful antitrust scrutiny of the Antitrust Divi- sion of the Department of Justice. In the proposed merger between Edison and SDG&E, the Department of Jus- tice actively participated in the FERC hearings. Ultimately the Applicants were able to satisfy the Justice Department 's concerns by modifying their proposed transmission commitments to specify the delivery points involved and to incorporate an auction pricing mechanism.

5. At present, the acceptance of broad transmission commitments will not, standing alone, obviate the need for competition hearings at the FERC. In

support of its hostile takeover effort to acquire KG&E, applicant Kansas City Power & Light Company assayed this approach and was rebuffed, al though it did succeed in obtaining an expe- dited schedule for further proceedings. Kansas City Power & Light Co., 53 FERC ~ 61,097 (1990). In the words of Commissioner Trabandt, in his con- currence, it should be "clear to all future applicants that they cannot 'sweeten the pie' with transmission in order to avoid a hearing on a merger. Any suggestion, past or future, that voluntary conditions are a ticket to summary approval based on a wink or nod at the Commission will, I hope, have been dashed by this order." Id. at 61,297. This may change if the FERC issues its own merger prescription in the form of guidelines.

6. There has been near universal rec- ognition in recent years that antitrust principles, properly applied, provide a "consumer welfare prescription." Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979); accord Westman Comm'n Co. v. Hobart Intern., Inc., 796 F.2d 1216, 1220 (10th Cir. 1986); General Leaseways, Inc. v. National Truck Leas- ing Ass'n., 744 F.2d 588 (7th Cir. 1984); Liggett Group, Inc. v. Brown & Wil- liamson Tobacco Corp., 748 F. Supp. 344, 352 (M.D.N.C. 1990) ("Injury to competition occurs only if a competitor is able to raise and maintain prices in the relevant market above competitive levels because this is the only situation where consumer welfare is threatened"). Competition policy, in other words, is supposed to foster practices that deliver more output to consumers at lower costs - - the very same goal that economic regulation of utility mergers embodies.

7. DOJ Guidelines § 1; Northeast Utili- ties Serv. Co., 50 FERC ~ 61,266 at 61,834 (1990); Kansas Power & Light Co., 54 FERC ~ 61,077 (1991).

8. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) (quoting Brown Shoe Co. v. U.S., 370 U.S. 294, at 370 (1962)).


9. Roland Machinery Co. v. Dresser Indus., 749 F.2d 380, 394 (7th Cir.

1984).

10. Town of Concord, Mass. v. Boston Edison Co., 915 F.2d 17 at 21-22 (1st Cir. 1990) (cites omitted). One example of the tendency to raise such non- merger related contentions is the claims made by t ransmiss ion-depen- dent util i t ies in the Ed ison /SDG&E case. The merger had no impact on the uti l i t ies ' re la t ionship with Edison, as they stood in the same shoes vis-a- vis Edison 's t ransmiss ion system both before and after a merger. Nonethe- less, in these merger approva l proceedings before the California Public Utili ty Commiss ion these enti t ies were permi t ted to re-argue ant i t rust claims having nothing to do with the merger that had a l ready been twice rejected in federal district court. See Cities of Ana- heim, et al. v. Southern California Edi- son Co., 1990-2 Trade Cas. (CCH) 69,246 (1990), appeal filed, No. 90-56375 (9th Cir. 1990); City of Vernon v. South- ern California Edison Co., No. CV83- 8137, slip op. (C.D. Cal., Aug. 30, 1990), appeal filed, No. 90-56281 (9th Cir. 1990).

11. See, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 604-06 (1985) ("[R]efusal to deal with High lands does not violate Section 2 if val id business reasons exist for refusal."); Hecht v. Pro Foot- ball, Inc., 570 F.2d 982, 993 (D.C. Cir. 1977), cert. denied, 436 U.S. 956 (1978) (refusal to provide access to RFK sta- d ium is val id if it wou ld interfere wi th Redskins ' existing uses); Oahu Gas Service, Inc. v. Pacific Resources, Inc., 838 F.2d 360, 368-69 (9th Cir.), cert denied, 488 U.S. 870 (1988); Cities of Ana- heim, et al., Id. at 64,911-12.

12. Utah Power & Light Co., Opin ion 318, 45 FERC ~ 61,095 (1988), reh'g granted in part, 47 FERC ~ 61,209 (1989); Utah Power & Light Co., Opin- ion 318A, 47 FERC ~ 61,209 (1989).

13. FERC Docket No. EC90-10-000, et al.

14. Terra Comfort Corp., 52 FERC 61,241 at 61,846 (1990) (Trabandt,

Comm'r , dissenting).

15. More precisely, in Jefferson Parish Hospi ta l Dist. No. 2 v. Hyde, the Su- preme Court held that a 30% market share is insufficient to consti tute uni- lateral marke t power. 466 U.S. 2, 26 n.43 (1984). In United States v. Phila- de lphia Nat ' l Bank, 374 U.S. 321,363- 66 (1963), the Court indicated that mergers creating a firm with more than a 30% market share created a re- but table p resumpt ion of "ant icompet i - tive tendency." A decade later, the Court rejected a challenge to a merger of two leading coal companies , find- ing the government ' s historical market share measures inaccurately por t rayed pos t -merger compet i t ive condit ions. See United States v. Gen- eral Dynamics Corp., 415 U.S. 486 (1974). Subsequently, ant i t rust courts have treated the 30% market share

threshold as merely establ ishing a "pr ima facie" case, and decisions have turned on a forward- looking examina- tion of whether the merger will in fact t rammel compet i t ion in the indus t ry involved. See, e.g., United States v. Baker Hughes Inc., 908 F.2d 981 (D.C. Cir. 1990)(approving merger giving merged firm 76% share of the market in hardrock hydraul ic unde rg round dri l l ing rigs and which HHIs from 2878 to 4303); J. Whalley, Department of Justice Merger Enforcement, 57 ANTI- TRUST L.J. 109 (1988) (Since General Dy- namics, merger analysis has moved away from marke t shares "to an evalu- ation of the economic and business re- alities of a merger.")

16. Moreover, the proper focus in cal- culat ing the merging companies share of the del ivered bulk power market is on sales to non-nat ive load customers. Generat ion commit ted to native load customers is not avai lable to compete in the market at large. There is no una- n imi ty on how best to measure a f irm's share of this market: one expe- dient for guidel ine purposes wou ld be to focus on regional economy energy sales. In most areas of the country, the market for procurement of new capacity contracts is extremely competi t ive, with mul t ip le non-ut i l i ty generat ion suppl ies avai lable to keep long-term prices down. Economy energy sales figures thus p robab ly represent a reasonable proxy for historical market share in the potent ia l ly affected market for de l ivered bulk power.

Arguably, such a focus leaves a possible gap for short- term capacity sales for several years immedia te ly follow- ing the merger before newly con- tracted-for capaci ty can be installed. However , when a uti l i ty experiences a short- term capaci ty shortfall, it is generally the result either of historical ac- cident or of short-s ighted planning or regula tory decisions. Thus, it seems reasonable to place the burden of prov- ing that such a discrete market exists, and that a merger wou ld impact it ad- versely, upon those who advance such a contention.

17. See J. Moot, Electric Utility Merg- ers: Uncertainty Looms Over Regulatory Approvals at the FERC, 12 ENERGY L. J., 1 (1991).

18. In the meant ime, appl icants in the KP&L/KG&E merger have negot ia ted a p roposed set t lement of compet i t ion issues involving wide- ranging transmission commitments that ev ident ly were modeled on commitments accepted by the Commiss ion in certain of its marke t -based pr ic ing decisions. These commitments appear to put the appl icants ' coordinat ion transact ions at risk and to contain other features that other uti l i t ies might find unac- ceptable for economic and p lanning reasons. Offer of Settlement, da ted May 29, 1991, FERC Docket No. EC91- 2-000.

July 1991 27

merger proceedings that work: a look to the future

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