Inter-Union Gas Workers Conference
September 26, 2000
Palm Springs, California

Labor Union Utility Mergers Toolbox

by
Attorney Deborah Groban Olson
(with research assistance from Kimberly Kefalas)

 

I.                    Introduction

My purpose today is to provide you, as labor leaders, with ammunition to protect your members and your organizations as you deal with the new regulatory and economic environment that encourages utility mergers. My paper will provide you with some background on why utility mergers are increasing, and how the role and mindset of regulators has changed in recent years. It will cover some technical information on merger tests used by the regulatory agencies, which may be helpful to technical staff in the audience, (which I wonât cover in the speech). My focus will be on issues that unions should consider when facing a merger, and tools you can use to provide leverage to deal with those issues. These comments come from my research and experience representing a gas workers' local in a merger of a gas company and an electric company, from a general review of legal, business and labor literature concerning utility mergers, and from my experience developing capital strategies for labor unions over the past 20 years.

II.                 Background

A.    Regulators role shifts from assuring supply and fair access to regulating competition over bottleneck resources  from protecting the public to protecting competition

The regulatory paradigm has shifted over past 25 years from regulation aimed at assuring regular and non-discriminatory supply and acceptance of natural monopolies to one of promoting competition and maximizing consumer choice. The regulators now view the utilities as common carriers and focus on allocation of rights between competing providers over bottleneck resources. The assumption of the new model is that market forces will ensure adequate supply at reasonable prices. New laws and regulations require direct, instead of indirect subsidies for low-income and educational customers. However, these low-income groups have less bargaining power now that their subsidies are no longer the quid pro quo for monopoly rights.

i. Although most federal barriers to inter and intrastate competition in the energy industry have come down, heavy state and local regulation persists. Additional regulatory layers are added when utilities are publicly traded or when they use nuclear energy. Thus, much of the real merger work takes place in front of regulatory agencies. Hearings become arenas in which competitors raise obstacles that must be overcome at the same time the regulators are being satisfied.ä[1]

ii. The original paradigm (of regulation) was established over 100 years ago with the enactment in 1887 of the Interstate Commerce Act. That paradigm was characterized by legislative creation of an administrative agency whose task was to oversee an industry providing common carrier or public utility services. The firms in the industry remained privately owned, but they were closely monitored by the agency to ensure that they provided services in standardized packages at standardized prices to all similarly situated end-users and to ensure that those services were reliable. To achieve the legal regime's goal of standardization in services and prices ("non discrimination"), providers were required to file their rates and services with the agency in public tariffs from which no deviation was permitted, and the agency reviewed complaints by end-users about these prices and services. To promote reliability, the agency strictly limited entry and exit in the industry and regulated rates so that providers earned adequate (but not "excessive") profits. This legal regime has been giving way over the last quarter-century to a very different paradigm. The new paradigm•instead of striving for equality of treatment among end-users and reliability of service •seeks to encourage multiple  [*1326] providers to offer different packages of services at different prices to end- users, on the theory that competition among these providers will enhance consumer welfare. Thus, in one regulated industry after another, we see a movement to eliminate tariffed services in favor of contractual choice, to unbundle standardized packages of services in order to allow end-users to select among different service elements, and to eliminate restrictions on entry in order to encourage competition among multiple providers. The role of the agency has been transformed from one of protecting end-users to one of arbitrating disputes among rival providers and, in particular, overseeing access to and pricing of "bottleneck" facilities that could be exploited by incumbent firms to stifle competition. [2]

B.     Agencies regulating utility mergers and their jurisdictions.

1)      Federal Energy Regulatory Commission (FERC)

The Federal Energy Regulatory Commission, formerly the Federal Power Commission, gets its jurisdiction from the Federal Power Act[3]. It regulates the electric supply and generation industry and electric company mergers in so far as companies engage in interstate electric transmission or commerce.[4] It regulates the natural gas industry in so far as the company transports natural gas via an interstate pipeline.[5] FERC has the ability to approve or disapprove of all electric industry mergers over which it has jurisdiction via the Federal Power Act. This, so far, includes mergers of an electric supply company that sells electricity wholesale with a natural gas supply company or other kind of business, although some commentators believe that should be challenged.[6]

2)      State Public Utility Commissions (PUC)

Generally, state public utility commissions control retail sale and transmission of electricity and gas. However, there are frequently jurisdictional disputes about which agency controls in particular cases. For example:

a. where gas and electric companies seek mergers; [7] or

b. FERC involvement where retail rates are affected and a state agency has authority.[8]

c.Interested parties or state regulators challenge FERC assertion of so much power. In so far as an electric company is only involved in retail sales of electricity, the FERC has no jurisdiction over it.  In fact, courts have struck down as unwarranted extensions of jurisdiction actions of the FERC involving conditions for approving a merger that involved retail fixes (i.e., retail price fixing), even if that was aimed at a wholesale problem.

d. Most natural gas suppliers are also subject more to state regulation than to federal.

An article describing the merger of Pacific Industries and Enova states, From the outset, everybody knew the merger would be made or broken at the Utilities Commission hearings, which began in May 1997. It was the only forum in which an evidentiary hearing would be held, and the other agencies were to some extent willing to take their cues from the CPUC decision. According to state [CA] law, before it can approve a merger, the CPUC must be convinced that synergies which function in both the public and the shareholders' interests will result. A minimum of half the savings from those synergies must be passed along to the ratepayers, and the quality of management and services must not be adversely affected. The reason the merger made sense,â says LoBaugh, was because although we are the biggest gas company in North America, we are not an electric company. We overlap several electric providers in our service area, and to be in a position to compete in a deregulated electric market, we'd concluded that we'd have to acquire the necessary infrastructure and expertise through joint venture, partnership or merger. [9]

3)     A myriad of regulators and interveners

Any utility merger faces a myriad of potential regulators and interveners at all levels of government, providing unions with many potential allies in a merger dispute. It also provides leverage for the union with the potential merger partners who need all the friends they can get. Every party calls the jurisdictional questions in the manner most useful to themselves. For example, states or municipalities are often interveners in applications for merger approval. In order to merge, utility companies often have to navigate a complex web of federal, state, and local regulatory agencies, including State Public Utility Commissions, local ordinances, the FERC, and the US Department of Justice (DOJ) and the US Federal Trade Commission (FTC). In addition, there are usually numerous interveners on behalf of the public interest either supporting or opposing any merger. Often these interveners are municipalities, ad-hoc consumer groups, the potential competition for the future merged corporation, and even labor unions.

4) Companies grappling with deregulation seek mergers to maintain advantages of size while sidestepping the regulators current definitions of unfair concentration of market or bottleneck resources.

a. Companies, which formerly held what regulators permitted as natural monopolies in the interests of providing good service at good prices, are now expected to provide those services via free market. Formerly regulated monopolies are now required by FERC to share their transmission facilities or sell at wholesale prices to former competitors.

b. Some mergers of neighboring electric companies have been disallowed, even where they would provide for significant cost savings, because together they would monopolize an electric grid, which now must save room for other competitors.

c. Electric and gas mergers are popular because they are not selling same product. These mergers can retain the economic power of size, without running the risk of becoming the sole user of an electric grid that must be shared. There are numerous companies that are both electric and gas companies. In these cases it is hard to show the merger results in squeezing out competition if the companies weren't competing in the first place. Divestiture of certain assets is often required in such gas and electric mergers to avert potential anti-competitive effects.[10] A potentially interesting argument could be made that such a merger squelches competition because it takes away the potential for competition between the pre-merger companies. For example, if a gas and electric merger effectively cuts off any chance of the gas company branching off into the electric supply business or the electric company branching off into the gas supply business, which would be a source of competition, and would seem to be possible because of new facilities sharing rules meant to encourage such extensions of product marketing.

5)    FERC and changing merger guidelines

a. The purpose of the FERC 1996 Policy Statement[11] regarding the imminent amendment of regulations to update and clarify procedures and policies concerning public utility mergers in the light of changes in the regulation of the electric power industry, is to ensure that mergers are consistent with the public interest and to provide greater certainty and expedition in the Commission analysis of merger applications.

b. The Energy Policy Act of 1992[12] permitted new power suppliers, called exempt wholesale generators, to enter wholesale power markets, and expanded the Commission authority to require transmitting utilities to provide eligible third parties with transmission access.

c. Commission Open Access Rule[13], adopted in 1996, requires that each public utility that owns, operates or controls interstate transmission facilities to file an open access transmission tariff that offers both network and point-to-point service. The rule is designed to remedy the undue discrimination that is inherent when a utility does not offer truly comparable transmission service to others, and to promote competitive bulk power markets. FERC, in its 1996 Policy Statement, also stated that many states are contemplating retail access--and that was in 1996. Since then, state utility commissions have begun authorizing retail access. According to www.utlityconnection.com there are 42 different customer choice programs underway in a variety of states. Michigan provides one recent example.[14]

 d. Federal Power Act standard that the merger contemplated must be consistent with the public interest, must account for changing market structures and pay close attention to the possible effect of a merger on competitive bulk power markets and the consequent effects on ratepayers. Section 203 of the Federal Power Act provides that no public utility shall sell, lease, or otherwise dispose of the whole of its facilities that are subject to the Commission jurisdiction, or any part thereof with a value in excess of $50,000, or by any means whatsoever, directly or indirectly, merge or consolidate such facilities with those of any other person, or purchase, acquire, or take any security of another public utility without first securing the Commission approval.

1.      Under its 1996 Policy Statement, FERC moved away from its traditional ãhub and spoke method for measuring market concentration. This method looked at the number of utilities with which the applicant connected, and the effects of the merger on the access of these utilities to the grid after the merger. FERC now requires more detailed economic and market data, and will approve without hearing mergers, which meet the Department of Justice, and Federal Trade Commission Horizontal Merger Guidelines (Guidelines).[15] FERC will generally take into account three factors in analyzing proposed mergers: the effect on competition, the effect on rates, and the effect on regulation.

2.      Regarding the effect on Competition, the FERC Policy Statement adopted the DOJ/ FTC Merger Guidelines as the analytical framework for examining horizontal market power concerns. The Guidelines set forth a five-step merger analysis:

(1) define markets likely to be affected by the merger and measure the concentration and the increase in concentration in those markets;
(2) assess whether the merger, in light of market concentration and other factors that characterize the market, raises concern about potential adverse competitive effects;
(3) assess whether entry could mitigate the adverse effects of the merger;
(4) assess whether the merger results in efficiency gains not achievable by other means; and
(5) assess whether, absent the merger, either party to the merger would likely fail, causing its assets to exit the market.[16]

3.      Effect on Rates: applicants are required to propose appropriate rate protection for consumers (Note, this is for wholesale consumers.)

 

4.      Effect on Regulation:

i. It shifts merger regulation to SEC where the applicants will be part of a registered public utility holding company and can commit to still abide by FERC policies with regard to affiliate transactions. Otherwise FERC will set the issue for hearing (i.e., whether or not to grant the merger).

ii. Where a state commission has authority to act on the merger, FERC intends to rely on the state commissions to exercise their authority to protect state interests.

5.      Mergers that do not pass these tests, and when arrangements to make them satisfactory (this is called the market power test) will be set for a trial-type hearing. Also, when the FERC thinks it would be in the public interest, they can impose various remedies to move the merger along.

6.      Although they expect that most mergers will fulfill all three requirements (i.e., post-merger market power will be in acceptable thresholds or be satisfactorily mitigated, acceptable customer protections must be in place, and any adverse effect on regulation must be addressed), there could be circumstances in which a merger will result in severe market power problems but would still be in the public interest, etc.

7.      Note: changing industry results in mergers that are differently structured, i.e., mergers between public utilities and natural gas distributors and pipelines, consolidations of electric power marketer businesses with other electric or gas marketer businesses, etc. These would not have a competitive impact, because there can be no increase in the applicant market power unless they are selling relevant products in the same geographic market.

8.      In 1998, FERC issued a Notice of Proposed Rulemaking[17] in which it fine tuned the horizontal market power test and adopted a vertical market power test. It also created a computer simulation model and sought to lessen the information burden on mergers.

 

 

III.Ê Union Concerns and Union Merger Toolbox