Distributed Resources and Distribution Mergers:
Are They on a Collision Course?

To make electricity consumption more cost-effective and less carbon-dependent, states are seeking to stimulate new products and services in the distribution space.  Successful stimulation requires effective competition.  So Maine and New York are exploring whether to appoint as "smart grid coordinator" (Maine) and as "distribution system platform provider" (New York) an entity independent of the incumbent utility.

But there is a countertrend.  Thirty years of utility mergers have consolidated dozens of local distribution companies into a much smaller number of multistate, holding company-controlled systems.  When these mergers involve adjacent entities, they remove each merging partner’s most formidable potential rival in the new distribution services markets.  The latest example is the proposed coupling of Exelon and PHI Holdings, which would eliminate competition between Baltimore Gas & Electric and Potomac Electric.

Thirty Years, Dozens of Mergers, No Studies

Welcome to the most under-studied question in electricity merger policy.  For 30 years, regulatory decisions have focused on preventing mergers from creating or enhancing market power over bulk generation and transmission services.  No decision has considered a merger's effects on the nascent markets in distributed energy resources.  Only two analogues come to mind.  The FCC Staff's epic critique of the withdrawn AT&T and T-Mobile merger (2011) cited T-Mobile's "disruptive" innovations in retail products and pricing as a reason to keep the companies separate.  And the California Commission's rejection of the Southern California Edison-San Diego Gas & Electric merger (1991) cited those companies’ "across-the-fence" rivalry:  The "loss of SDG&E as a regulatory comparison is an adverse unmitigable impact of the proposed merger," diminishing the Commission's "ability to regulate the merged utility effectively."1  In the dozens of other merger decisions, nearly all approvals, no other systematic assessment of distribution-level competition appears.


Testimony, Papers, and Presentations

Utilities are seeking to earn returns on equity above the real cost of equity. Currently, there are five strategies: (1) move assets from state jurisdiction to FERC jurisdiction; (2) use holding company debt to fund utility subsidiary equity (aka "double leveraging); (3) seek supranormal returns as "incentives" to perform normal tasks; (4) seek authorized returns that reflect certain business risks while shifting those risks to ratepayers; and (5) use "riders" reduce business risks without reducing authorized return on equity. This presentation describes these strategies.
After a century of near-choicelessness, consumers want supply choices and lower costs; while after a century of solid service, traditional utilities want predictable demand and stable revenues. On both sides, the arguments shade from legitimate and public-spirited to the cagey and opportunistic. Resolving the conflicts requires us to apply economic and legal reasoning that reflects common sense, economic efficiency, and constitutional principles. This article seeks to sort out these points.
Microgrids can enhance security and local control for discrete locations on the larger interconnected electric grid. The relationships and mutual responsibilities of the microgrid and the external grid need to be carefully defined, however. Here is a framework for doing just that.
In this proceeding before the Mississippi Public Service Commission, Entergy proposes to sell its transmission facilities to ITC at a gain. The transaction is a “spin-merge” transaction in which Entergy shareholders will end up owning 51% of ITC, along with their shares of Entergy.
Non-transmission alternatives will not receive the consideration they deserve – and consumers will lose the reliability and cost-saving benefits NTAs may offer – unless FERC makes clear that transmission providers have an affirmative obligation to consider them.

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