Where Herfindahls can lead you astray: An analysis of FERC's approach to vertical mergers

Electricity Journal

Volumn 13, Issue 3, 2000, Pages 69-74

  Daniel, Timothy P ^a  

^a Natl Economic Research Associates   (United States)

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EID: 0034165297     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(00)00100-7     Document Type: Article

References (12)

1. 1. Dominion Resources, Inc. and Consolidated Natural Gas Company, Docket No. EC99-81-000, Order Conditionally Approving Disposition of Jurisdictional Facilities (issued November 10, 1999). Hereafter cited as Dominion/CNG Order.
2. 2. FERC identifies the upstream market to be "delivered natural gas," a somewhat confusing term given the clear distinction between the market for the purchase of commodity natural gas and the market for the transportation of natural gas to a particular location. The analysis in this article is not sensitive to this market definition issue, which could be important in certain contexts.
3. In an earlier order, San Diego Gas & Electric Company and Enova Energy, Inc., et al. 79 FERC ¶ 61, 372 (1997) (Enova Order), FERC identified a third mechanism by which a vertical merger might harm competition: The merged firm might be able to evade binding rate regulation in either the upstream or the downstream market. This concern was not raised in the Dominion/CNG Order, and we do not discuss it here except to acknowledge that economists have long recognized that vertical mergers might allow a firm to evade rate regulation. See, for instance, T. Brennan, Why Regulated Firms Should Be Kept Out of Unregulated Markets: Understanding the Divestiture in United States v. AT&T, 32 Antitrust Bulletin 741 (1987).
4. 2 = 3, 333.
5. 5. This article analyzes the impact of vertical mergers in unregulated markets. While many energy-related markets remain regulated at both the federal and state level, regulators are constantly considering whether currently regulated markets might be safely unregulated. It is crucial, therefore, that the regulatory authorities, as well as private firms affected by markets with vertically integrated firms, understand the incentives of firms in unregulated vertically related markets.
6. 6. Supra note 1.
7. 7. Id.
8. 8. For a discussion of the economics of vertical mergers, see M. Riordan and S. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust Law J. 513 (1995). FERC's 1997 Enova Order, which was the first FERC Order that discussed vertical market power, cites theRiordan/Salop analysis in footnote 45.For a critical discussion of the economicmodels cited in the Riordan/Saloppaper, see D. Reiffen and M. Vita, Comment: Is There New Thinking on VerticalMergers? 63 Antitrust Law J. 917 (1995).
9. 8. For a discussion of the economics ofvertical mergers, see M. Riordan and S.Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust Law J.513 (1995). FERC's 1997 Enova Order, which was the first FERC Order that discussed vertical market power, cites the Riordan/Salop analysis in footnote 45. For a critical discussion of the economic models cited in the Riordan/Salop paper, see D. Reiffen and M. Vita, Comment: Is There New Thinking on Vertical Mergers? 63 Antitrust Law J. 917 (1995).
10. 9. For an economic model in this spirit, see J. Ordover, S. Salop, and G. Saloner, Equilibrium Vertical Foreclosure, 80 Amer. Econ. Rev. 127 (1980).
11. 10. According to FERC's recent Dominion/CNG Order, "Applicants report that CNG directly serves four generators accounting for a total of 445.2 MW. Eighteen generators receive gas directly from a CNG-affiliated LDC." (footnotes omitted) While the Order does not disclose the exact locations of these electric power generation facilities, the vast majority of the generators served by a CNG-affiliated LDC reside outside Virginia. And, of those generators served by CNG in Virginia, the FERC's Order notes that three are either owned or under contract to Dominion and thus "not relevant to a raising rivals' cost analysis." (Dominion/CNG Order, footnote 16.)
12. 11. A related concern would arise if the newly merged firm controlled other generating facilities that did not rely on the fuel source sold by the upstream firms in Figure 1. In such circumstances, increases in the price of delivered gas might increase the market-clearing price of electricity, thereby increasing the margins earned by the merged firm's facilities that generate electricity with alternative fuels, such as coal, hydro, or nuclear power.