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<td width="75%" valign="top"><p ALIGN="left"><font face="Arial" size="6"><b><strong>Judge
'Rules' Generators Can Agree Not To Compete </strong></b></font></p>
<p ALIGN="center"><font face="Arial" size="4"><b><strong>PECO Worries FERC View of
'Marketpower' is Based On Old Market</strong></b></font></p>
<p><font face="Arial" size="4"><strong>BY SEASON HAWKSLEY<br>
RESTRUCTURING TODAY</strong><br>
(<em>originally published by PMA OnLine Magazine: 10/98</em>)</font><font size="4"></p>
</font><p><font face="Arial">At a recent American Bar Assn antitrust gathering seminar
leaders had set up a hypothetical situation where a utility wants new generation but
doesn't want to risk building on its own, noted Ray Bolze of Howrey & Simon.<br>
<br>
They strike a deal with a power generator from outside the area that has been considering
getting into that market, Bolze told the Restructuring Today Antitrust Breakfast Friday. <br>
<br>
They sign an agreement for the IPP to do the building. Of the three sites available, the
utility owns one. The IPP has an option on a second site. <br>
<br>
A third is owned by a muni and the three locations are the only ones available and
economically feasible in that market. The utility agrees to take a third of the output and
the partners set up a joint venture to market the other two thirds but not in the service
territory of the utility.<br>
<br>
The IPP agrees not to build a plant on its site. They calculate that a market exists for
one new plant over the next five years. <br>
<br>
The deal raises serious questions about the legality of agreeing not to compete and
dividing markets.<br>
<br>
"Believe it or not," said Bolze, "what we (bar seminar attenders) came out
with was that the decision would rely on the rule of reason and not treat the question as
a per se violation (illegal on the face of it) and there's a good chance you could win
this thing," Bolze predicted. <br>
<br>
The victory would be based on changes in the market, he said. Agreeing not to sell at
retail may sound bad but the power might be sold to a retailer who would sell it at
retail, said Bolze.<br>
<br>
Bolze had invited a distinguished 7th Circuit Appeals Court jurist to decide the issue --
Richard Cudahy who wrote the 80-page decision that opened up AT&T in the 1980s.<br>
<br>
He ruled that the rule of reason makes more sense than considering the challenged behavior
a per se violation. Both sides had used economists as witnesses. Judge Cudahy was
persuaded by the generation team's arguments that without the accord, the area wouldn't
get the needed generation. <br>
<br>
PECO Power Team's Marjorie Philips, an attorney, doubts the Pennsylvania PUC would approve
a deal like that. Bolze countered that if the power is needed the PUC might feel it needs
to encourage the deal. <br>
<br>
That particular IPP last time it built generation took a bath 10 states away and has
decided to joint venture all new generation, said Bolze. <br>
<br>
The restriction is five years, not 10 and is "very reasonable," Bolze quoted the
IPP. If the market shoots way up within an ISO, there's no reason other parties can't come
into the market, he added. <br>
<br>
Philips suggested Jade Eaton, utility antitrust official at the Justice Department, would
not go along with such a contract.<br>
<br>
"Roger Fones, her boss, was on the other side at the seminar," Bolze confirmed
and he firmly supported a per se interpretation, "as he's supposed to do."<br>
<br>
Yet Bolze saw a good chance that Fones could be convinced not to attack the agreement, to
use the rule of reason because of the justification -- because you can't economically
justify building the first plant if someone could build the second. <br>
<br>
"Who's getting the benefit from that?" asked Floyd Norton of Morgan, Lewis &
Bockius.<br>
<br>
"The parties are. The state is because it needs the new capacity," replied
Bolze.<br>
<br>
"What's the justification for not developing the second site?" asked Norton. The
parties would testify that they have economic studies showing that with the second plant
they'd go bust. They have a letter from Wall Street saying the firm would not approve a
bond issue by the utility without the agreement.<br>
<br>
Philips objected to defining the market as the state -- an old fashioned concept. Today
the second generator, she noted, could serve PJM and ECAR "very economically." <br>
<br>
John Hughes of ELCON brought up the view of an ISO New England official who criticized the
number of new plants intended for the region. <br>
<br>
"We don't need all these plants," Hughes quoted.<br>
<br>
"It's not his business to decide what gets built," Hughes reminded speaking for
American industrial companies. Philips defended the ISO official who has so many
transmission upgrades that "they don't know how to prioritize."<br>
<br>
"The price of power should drop," said Philips with a chuckle, "if a lot of
the projects are built." <br>
<br>
"He's (the official) a central planner looking at an administrative burden,"
added Brian Jordan of the Power Team. <br>
<br>
Jordan was not as worried about the antitrust implications because of "the overriding
market that provides that whatever you don't do, somebody else will do." <br>
<br>
The government analyzes the issue in terms of barriers to entry, noted Bolze. If others
can compete, he said, market forces should be allowed to play out. <br>
<br>
If you have options to buy, noted Norton, it wouldn't show up in an analysis of your
resources and role in the market but may determine your role in the market. <br>
<br>
With an option you don't know whether it's going to be exercised, added Philips. "We
couldn't consider it a done deal," she noted. A market analysis based on longterm
deal making isn't very realistic today, she said, so that options fit right into today's
short-term operations allowing the firm to avoid a longterm commitment and the need to
decide now, Philips explained. <br>
<br>
"The study in the case doesn't reflect the dynamics of a market that's no longer
utility-to-utility," she added. <br>
<br>
Jordan cited "the huge impact" of the role of the financial community in that
you can come into the market with no assets and no installed capacity and can start buying
power for next summer into Cinergy or COB and if you have the financial backing you can
run that price up today.<br>
<br>
It's not theory, Jordan explained. "It's the way financial markets work. If you have
deep pockets you can buy up July into Cinergy and the price will go up and up and
up," Jordan noted. "You get market power because you have deep pockets." <br>
<br>
Philips has followed what it sees as FERC's vision of what the industry should be. They
were among the first to give up transmission (to the PJM ISO) and now functional
unbundling and divestiture and "we're going to have a genco and an LDC."<br>
<br>
The problem is that the traditional tests have linked the two. "You couldn't dominate
anyone else's market so you were OK. Now, with the uncoupling of generation and load
obligations you suddenly have a lot of uncommitted energy and a lot of uncommitted
capacity. <br>
<br>
"That's probably how the world is going to work in the future," Philips
forecast. FERC's market power analysis has not come around to that world view, she
observed. It's moving but is still committed to the old world views, she said.<br>
<br>
The neighboring state might not have competition yet, Philips noted, complicating the
picture.<br>
<br>
Bolze knows of federal judges who would look at the PECO concern sympathetically.<br>
<br>
Norton sees a need for FERC to refine its analysis of retail competition.<br>
<br>
Should they change the Herfindahl-Hirschman Index (HHI), the market power test in Order
888?<br>
<br>
"It affects the HHI," replied Norton. <br>
<br>
"To figure HHI you have to calculate each participant's share - particularly if your
product is available capacity -- you have to have a base case that tells you what
everybody's share is. You have to find out how much is committed to native load and how
much is loose in the market. <br>
<br>
"I don't think FERC has quite figured out how to deal with that," Norton added. <br>
<br>
In PJM where Pennsylvania is out in front and the other states are headed in that
direction, it's fair, Norton thinks, for FERC to assume open retail competition and assume
the capacity is all loose in the market. <br>
<br>
In a couple years it will be. <br>
<br>
It's the uncommitted capacity that's traditionally looked at as potential market power,
Jordan said, adding "we lost our monopoly so we could potentially be looked at as
gaining market power." <br>
<br>
Yet Southern Co has not lost its monopoly but since it has capacity committed to a captive
rate base, it doesn't get any increase in market power, Jordan noted. <br>
<br>
"It's almost perverse," Jordan added. <br>
<br>
Philips stressed that PECO has not yet gotten any official indication that FERC or others
will officially consider uncommitted capacity per se to be a measure of market power now
that they've given up its monopoly.<br>
<br>
But they're worried that's going to be the next step. <br>
<br>
While some areas need to be more open in Philips' view, "it doesn't get much more
competitive than PJM today in terms of market players" and the ability to jump into
and out of the market, she added. <br>
<br>
"If PECO -- not on a hot, high load day -- decides to put up the price someone can
come into PJM and beat us in an instant and we've got problems. We would go into a minimum
generation day when we can't give this stuff away," Philips said. <br>
<br>
We asked her why so many generation units were scheduled for maintenance in the Midwest in
June.<br>
<br>
Many units are traditionally down in the shoulder (spring and fall) months.<br>
<br>
"There was nothing extraordinary about the amount of units taken out for maintenance.
What was extraordinary was the unit taken out by a storm," she replied, "and in
MAIN and MAAC there were nukes that had been out longterm." <br>
<br>
"What if someone decides to have a strategic outage?" asked ELCON's John Hughes.
<br>
<br>
"In PJM you can't do that," replied Norton. He blamed part of the price spike on
PJM action in declaring a maximum generation emergency and said nothing committed to the
pool could leave so that it all had to stay in PJM. <br>
<br>
And a lot of power scheduled to go to ECAR was stopped, we reminded. And so the price
dropped in PJM and shot up in ECAR, Norton interjected.<br>
</font><font SIZE="3"></p>
</font><hr>
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Phone 1-800-486-8201 or 202-298-8201 and fax to 1-202-298-8210. One year's subscription is
$487 in US funds (plus 8% sales tax in the District of Columbia). George Spencer, editor.
E-mail: <a href="mailto:[email protected]">[email protected]</a></font></p>
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