AAI Working Paper 04-02. Electricity Mergers, Economic Analysis, and Consistency: Why FERC Needs to Change Its Approach

Sep 19 2004
Working Papers

ABSTRACT: The electricity merger wave of the last decade affords the unique opportunity to explore the numerous policy issues that have long held the interest of economists, ranging from the outcomes of merger activity to the process of merger review. This paper focuses on the Federal Energy Regulatory Commission’s (FERC’s) process of reviewing electricity mergers, which relies heavily on the merging parties’ analysis of their own merger using public data. This stands in contrast to the antitrust agencies performing an independent analysis based on a detailed review of confidential data. Applicant-filed merger analysis raises a number of important questions, in particular, whether the broad guidance provided in FERC’s Merger Policy Statement, coupled with a relatively passive stance on merger analysis--embodied in reliance on applicant-filed economic analysis--is sufficient to ensure consistency across merger filings. Based on an analysis of applicant-performed FERC merger analyses over the period 1997 to 2002, the answer appears to be “no.” Market concentration results for about 10 Midwestern markets analyzed in eight separate mergers shows a significant degree of variation in market concentration results. These findings raise a number of important issues regarding the consistency, predictability, and the credibility of the Commission’s decision-making on merger-related matters. Such concerns are very timely given the current resurgence of M&A activity in the industry and also extend to other areas of Commission policy such as requests for market-based rates where applicants also filed their own economic analysis. These issues should be resolved expeditiously by the Commission, either by bringing merger analysis “in-house” as a check on what the merging parties file and/or pursuing more accurate methods of market definition such as simulation models.

The working paper was subsequently published and is available at http://link.springer.com/journal/11151/32/3/page/1