Effective Regulation of Public Utilities

          My third book, Regulating Mergers and Acquisitions of U.S. Electric Utilities: Industry Concentration and Corporate Complication, will be published by Edward Elgar Publishing in October 2020. You can pre-order the book here or at most online bookstores. Here is the Summary of Contents. From February 2020 through March 2021, each of my monthly essays digests a book chapter. This month’s essay digests Chapter 6. Prior months’ digests are available here.

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            Mergers change market structures; market structures affect seller conduct. To protect competition on the merits, we must ask this question: Will a proposed merger weaken market structures, allowing the merged company to act anticompetitively or exploit unearned advantages?

Anticompetitive conduct

            Aggressive, pro-competitive conduct becomes unlawful, anticompetitive conduct when the seller acts to weaken competition rather than win the competition. Pro-competitive behavior yields competition on the merits. Anticompetitive behavior undermines competition on the merits. The incentive and opportunity to behave anticompetitively is especially strong when the merged company, directly or through affiliates, sells services in two distinct markets: one where it has a state-protected monopoly and one where it does not. It can exploit its market power in the former to undermine competition in the latter.

            Anticompetitive conduct can take at least four forms. Refusing to deal means denying competitors access to key inputs controlled by the merged company. A prominent example is transmission—essential for generation competition but not economically or practically duplicable by the generation competitors. If the merged company controls an upstream input and also competes with its wholesale customer in a downstream market, the company might also price squeeze—overcharge the wholesale customer for the upstream input, then underprice the customer in the downstream market. With tying, the merged company forces a customer who needs the company’s monopoly product (e.g., transmission access) to also buy the company’s competitive product (e.g. generation), thereby cutting out all generation competitors. Then there is cross-subsidizing: the merged company underprices its competitive product by overcharging for its monopoly product, thus abusing customers and competitors—a real two-fer.