GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2005

Status

Accepted

Abstract

In this draft chapter, Professor Pierce provides an overview of the ongoing process through which the Federal Energy Regulatory Commission (FERC) has been attempting to restructure the U.S. electricity industry to create effectively competitive wholesale electricity markets for almost two decades and of the merger policies FERC has adopted and applied during that period. Pierce gives FERC high marks for adopting as its own the DOJ/FTC merger guidelines and then attempting to apply those guidelines to the unique characteristics of the evolving competitive electricity markets FERC has been attempting to create. He identifies three difficult systemic questions FERC has encountered in that process, however: (1) Whether to evaluate proposed mergers based on the assumption that future markets will resemble present markets when FERC expects that future markets will differ significantly from present markets in the near future? (2) If FERC decides to evaluate proposed mergers based on the assumption that the potentially affected markets will change significantly in the near future, which of several potential future market environments should it use as the basis for its evaluation? (3) Whether to adopt a passive merger policy in which the agency only reacts to structural changes proposed by private market participants or instead to adopt a proactive policy in which the agency attempts to use its power to condition its approval of mergers on the merged firm's commitment to make other structural changes that FERC considers essential to the success of it restructuring program.

Pierce describes the extreme difficulty FERC has encountered in answering those questions. The basic problem remains the same in 2005 as it was almost twenty years ago when FERC began its efforts to restructure the electricity market. FERC lacks the power to require market participants to restructure in the ways that are essential to create effectively competitive markets, and it lacks the prescience to be able to predict how the restructuring process will evolve. After almost two decades, FERC has only reached about the halfway point in the restructuring process, and it still cannot predict with confidence some of the most important characteristics of the markets in which firms that propose to merge will participate in the future. Pierce concludes that the severe problems FERC has encountered have little to do with its merger policies. They are primarily attributable to Congress's decision to give FERC a mandate to create an effectively competitive wholesale market without giving FERC the regulatory powers required to implement that mandate. He also concludes that, to the extent that merger policy is an important element of the program to restructure the U.S. electricity industry, the situation remains as Professor (now-Justice) Stephen Breyer and Professor Paul MacAvoy found it in their 1974 study of the structure of the industry - we need many more mergers if we want to improve the performance of the electricity market.

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