The Economics of the The Economics of the Exelon/PSEG MergerExelon/PSEG Merger

Eric Emch, OECDEric Emch, OECD

eric.emch@oecd.oreric.emch@oecd.orgg

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Outline of TalkOutline of Talk

I.I. Overview of US regulatory environmentOverview of US regulatory environment

II. Competition policy in electricity marketsII. Competition policy in electricity markets

III. Background on the mergerIII. Background on the merger

IV. Economic analysisIV. Economic analysis

VI. Outcome/final thoughtsVI. Outcome/final thoughts

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Brief History of DeregulationBrief History of Deregulation

• 1992: Energy Act 1992: Energy Act – Authorized Federal Energy Regulatory Commission (FERC) to Authorized Federal Energy Regulatory Commission (FERC) to

require utilities, on a case-by-case basis, to provide other wholesale require utilities, on a case-by-case basis, to provide other wholesale buyers and sellers access to their transmission linebuyers and sellers access to their transmission line

– Created new class of generators to compete with traditional utilitiesCreated new class of generators to compete with traditional utilities

• 1996: FERC Orders 888 + 889 “open access rule” 1996: FERC Orders 888 + 889 “open access rule” – Opened transmission systems of investor-owned utilities to Opened transmission systems of investor-owned utilities to allall

qualified wholesale buyers and sellers qualified wholesale buyers and sellers – Required corporate separation of generation from transmissionRequired corporate separation of generation from transmission

• 1999: FERC Order 2000 Encouraged all privately owned 1999: FERC Order 2000 Encouraged all privately owned utilities to place their transmission under regional utilities to place their transmission under regional transmission organization (RTO)transmission organization (RTO)– Non-discriminatory transmission access administered by RTONon-discriminatory transmission access administered by RTO– Each designs its own market mechanism, within certain parametersEach designs its own market mechanism, within certain parameters

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Immediate Problem:Immediate Problem:CA Electricity Crisis of 2000-2001CA Electricity Crisis of 2000-2001

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• Market began operating in April 1998Market began operating in April 1998– Wholesale prices determined by day-ahead auction, retail Wholesale prices determined by day-ahead auction, retail

prices still regulatedprices still regulated– CAISO (California Independent System Operator) supervises CAISO (California Independent System Operator) supervises

market system and acts as supplier of last resortmarket system and acts as supplier of last resort

• Prices skyrocket in April 2000 and stay high for the Prices skyrocket in April 2000 and stay high for the following yearfollowing year

• Disruptions in supply, rolling blackoutsDisruptions in supply, rolling blackouts• Two of three state retail utilities declare bankruptcy, Two of three state retail utilities declare bankruptcy,

California Power Exchange declares bankruptcyCalifornia Power Exchange declares bankruptcy• In the end, FERC re-establishes price controls in In the end, FERC re-establishes price controls in

20012001

CA Price Spike in 2000-2001CA Price Spike in 2000-2001

6Source: June 2002 GAO Report “Restructured Electricity Markets”

October 2003.: Schwarzeneggerwins special recall

election

What Went Wrong in California?What Went Wrong in California?• Some explanations that have been given:Some explanations that have been given:

– Supply and demand shocks: difficult for new transmission to come Supply and demand shocks: difficult for new transmission to come online, unusually warm weather, also dry weather that meant less online, unusually warm weather, also dry weather that meant less hydrohydro

– Exploitation of market power inherent in the market structure, Exploitation of market power inherent in the market structure, exacerbated by:exacerbated by:

• Lack of long-term contracts, due to market rules that hindered usage of Lack of long-term contracts, due to market rules that hindered usage of long-term contracts and encouraged purchases on the spot marketlong-term contracts and encouraged purchases on the spot market

• Vertical dis-integration: state encouraged utilities to sell off generation; Vertical dis-integration: state encouraged utilities to sell off generation; may have exacerbated market power problemsmay have exacerbated market power problems

– Retail prices still frozen – no demand responseRetail prices still frozen – no demand response

• Prevailing view among economists is that Prevailing view among economists is that flawed market rules and oversight led to flawed market rules and oversight led to exploitation of market power by participants in exploitation of market power by participants in the marketthe market

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California PostscriptCalifornia Postscript

• FERC ultimately re-imposed price caps in FERC ultimately re-imposed price caps in California. State began to re-design California. State began to re-design electricity market.electricity market.

• Vertical integration / long-term Vertical integration / long-term contracting helped limit exercise of contracting helped limit exercise of market power in other markets, while lack market power in other markets, while lack of such integration / long-term of such integration / long-term contracting led to problems in CAcontracting led to problems in CA– E.g., Bushnell, Mansur, and Saravia (2007) “Vertical Arrangements, E.g., Bushnell, Mansur, and Saravia (2007) “Vertical Arrangements,

Market Structure, and Competition…” NBER Working paper #13507.Market Structure, and Competition…” NBER Working paper #13507.

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Prices in other marketsPrices in other markets

9Source: Bushnell, Mansur, and Saravia: “Vertical Arrangements, Market Structure, Source: Bushnell, Mansur, and Saravia: “Vertical Arrangements, Market Structure, And Competition: An Analysis of Restructured U.S. Electricity Markets.And Competition: An Analysis of Restructured U.S. Electricity Markets.

Local electricity markets in USLocal electricity markets in US

• Diversity of approaches by geographic Diversity of approaches by geographic region; some essentially fully regulated. region; some essentially fully regulated. Wholesale much more deregulated than Wholesale much more deregulated than retail, generally.retail, generally.

• Many parts of the government still involved Many parts of the government still involved in the markets in some wayin the markets in some way– FERC: Overall oversight, able to withdraw permission to operate FERC: Overall oversight, able to withdraw permission to operate

RTO market, or to cap pricesRTO market, or to cap prices– RTO: Direct oversight of particular market; sets market rulesRTO: Direct oversight of particular market; sets market rules– State public utility boards/state legislatures: especially in State public utility boards/state legislatures: especially in

remaining retail price regulation, siting and transmission issuesremaining retail price regulation, siting and transmission issues– Nuclear Regulatory Commission (NRC) for nuclear plantsNuclear Regulatory Commission (NRC) for nuclear plants– Also, standard antitrust oversight by US DOJ and FTCAlso, standard antitrust oversight by US DOJ and FTC

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Role of Competition PolicyRole of Competition Policy

• Merger policy:Merger policy:– Prevent accumulations of market power via merger, in a type Prevent accumulations of market power via merger, in a type

of market that can be particularly prone to exercise of market of market that can be particularly prone to exercise of market powerpower

• Section 2/Article 82 Abuse of dominanceSection 2/Article 82 Abuse of dominance– Much concern of FERC about discriminatory access to Much concern of FERC about discriminatory access to

transmission rights when setting up deregulated market; transmission rights when setting up deregulated market; some potential vertical issues regarding pipeline supply, etc. some potential vertical issues regarding pipeline supply, etc. in some marketsin some markets

• Section 1/Article 81 Price fixingSection 1/Article 81 Price fixing– Coordinated efforts to control prices could in theory be an Coordinated efforts to control prices could in theory be an

issue, but no recent DOJ/FTC cases in electricity markets issue, but no recent DOJ/FTC cases in electricity markets

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Electricity Mergers: Difficult IssuesElectricity Mergers: Difficult Issues

• Very inelastic demandVery inelastic demand– Consumers often don’t face true pricesConsumers often don’t face true prices

• Many retail prices still regulatedMany retail prices still regulated• Even when not regulated, are not usually set based on real-time Even when not regulated, are not usually set based on real-time

wholesale prices (except perhaps for large industrial customers)wholesale prices (except perhaps for large industrial customers)• Limited efforts to introduce real-time pricing Limited efforts to introduce real-time pricing

• Non-storability of electricity: consumers can’t Non-storability of electricity: consumers can’t spread demand over timespread demand over time

• Shape of supply curve means that withholding small Shape of supply curve means that withholding small amount of electricity from market at the right time amount of electricity from market at the right time can lead to large price swings, if price is set at can lead to large price swings, if price is set at highest bid. Large share not required for large highest bid. Large share not required for large impact on the market.impact on the market.

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13Source: US Dept. of Energy/Energy Information Administration

Sample Supply Curve

14Source: Speech of AG Tom Barnett before NY State Bar Association, Jan. 25, 2007. Note: For illustrative purposes only – not an actual representation of market conditions.

Electricity Mergers: ComplexityElectricity Mergers: Complexity

• Traditional presumptions based on market share can be Traditional presumptions based on market share can be misleadingmisleading– The effect of combinations of assets on the incentive and ability of a firm to The effect of combinations of assets on the incentive and ability of a firm to

exercise market power vary dramatically depending on location on the exercise market power vary dramatically depending on location on the supply curve. Simple capacity-based market shares don’t necessarily supply curve. Simple capacity-based market shares don’t necessarily capture this.capture this.

– For instance, combination of baseload (e.g., nuclear) plants may give a For instance, combination of baseload (e.g., nuclear) plants may give a large market share but leave the firm with very little ability to withhold large market share but leave the firm with very little ability to withhold output because it can be very difficult and costly to withhold baseload output because it can be very difficult and costly to withhold baseload output. On the other hand, a large share of baseload power could provide output. On the other hand, a large share of baseload power could provide incentive for withholding a small number of higher-cost “ability” assets incentive for withholding a small number of higher-cost “ability” assets acquired via merger.acquired via merger.

– Presence in the downstream retail market can affect incentives to exercise Presence in the downstream retail market can affect incentives to exercise wholesale market power.wholesale market power.

• Geographic and product markets vary hourly based on Geographic and product markets vary hourly based on supply and demand conditions. Potentially a very large supply and demand conditions. Potentially a very large number of discrete markets to analyze.number of discrete markets to analyze.

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Merger BackgroundMerger Background

• In late 2004, Exelon Corp. announced a $16 billion merger In late 2004, Exelon Corp. announced a $16 billion merger with Public Service Enterprise Group (PSEG)with Public Service Enterprise Group (PSEG)– Exelon owns 25,000 MW of generating capacity, PSEG 15,000 MW.Exelon owns 25,000 MW of generating capacity, PSEG 15,000 MW.– Overlaps in wholesale electricity generation in PJM region, as well as Overlaps in wholesale electricity generation in PJM region, as well as

ancillary services such as spinning reserves, regulation, and generation.ancillary services such as spinning reserves, regulation, and generation.– Each also had downstream retail commitments, Exelon via PECO, PSEG Each also had downstream retail commitments, Exelon via PECO, PSEG

via participation in New Jersey BGS auction for retail load.via participation in New Jersey BGS auction for retail load.– Exelon has significant low-cost nuclear and hydro, relatively fewer Exelon has significant low-cost nuclear and hydro, relatively fewer

high-cost “ability” assets. PSEG the reverse. Combination of incentive high-cost “ability” assets. PSEG the reverse. Combination of incentive and ability particularly dangerous.and ability particularly dangerous.

• Raw market shares/capacity in PJM pre merger:Raw market shares/capacity in PJM pre merger:– ““PJM East”: Exelon 20%, PSEG 29% of capacity. > $10 billion in PJM East”: Exelon 20%, PSEG 29% of capacity. > $10 billion in

electricity sales . Interface constrained 1,397 hours in 2005.electricity sales . Interface constrained 1,397 hours in 2005.– ““PJM Central/East”: Exelon 19%, PSEG 21% of capacity . Roughly $19 PJM Central/East”: Exelon 19%, PSEG 21% of capacity . Roughly $19

billion in electricity sales. Interface constrained 1,916 hours in 2005.billion in electricity sales. Interface constrained 1,916 hours in 2005.

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The PJM RTOThe PJM RTO

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The PJM RTOThe PJM RTO

• Has been growing. Originally covered mostly Has been growing. Originally covered mostly PPennsylvania, ennsylvania, New New JJersey, ersey, MMaryland (hence name), has expanded in recent aryland (hence name), has expanded in recent years.years.

• Day-ahead and real-time auctions for electricity, along with Day-ahead and real-time auctions for electricity, along with long-term contracts for power and many purely financial long-term contracts for power and many purely financial transactions for hedging and other purposes transactions for hedging and other purposes – Units are called in “merit order,” from lowest to highest offer. Auction pays Units are called in “merit order,” from lowest to highest offer. Auction pays

all generators the highest price bid that is accepted. all generators the highest price bid that is accepted.

• PJM Board is made up of 10 people, nominated by members, PJM Board is made up of 10 people, nominated by members, who represent utilities, generation owners, and transmission who represent utilities, generation owners, and transmission owners. Once on the board, independent of members. Can step owners. Once on the board, independent of members. Can step in to cap prices in areas if certain structural conditions are met.in to cap prices in areas if certain structural conditions are met.

• FERC has overall supervision of RTO, but does not intervene on FERC has overall supervision of RTO, but does not intervene on a day-to-day basis. Can declare the market no longer workably a day-to-day basis. Can declare the market no longer workably competitive, or can intervene if rates are not “just and competitive, or can intervene if rates are not “just and reasonable.”reasonable.”

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The MergerThe Merger

• Exelon claimed that the merger would yield Exelon claimed that the merger would yield efficiencies (increased output) in operation of efficiencies (increased output) in operation of nuclear power plants nuclear power plants – Some evidence of scale/scope effects in nuclear generation. Some evidence of scale/scope effects in nuclear generation.

Exelon nuclear facilities operated more efficiently than PSEG. Exelon nuclear facilities operated more efficiently than PSEG. Question as to whether or not this is merger-specific: might Question as to whether or not this is merger-specific: might be achieved by contract?be achieved by contract?

• Potential for higher prices as wellPotential for higher prices as well– Simulations submitted by 3Simulations submitted by 3rdrd parties in FERC parties in FERC

proceedings showed large price rises due to unilateral proceedings showed large price rises due to unilateral incentive to withhold electricity post-merger.incentive to withhold electricity post-merger.

• Regulatory thicketRegulatory thicket– FERC, PaPUC, NRC, DOJ, NJPUC all had to approveFERC, PaPUC, NRC, DOJ, NJPUC all had to approve

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FERC ReviewFERC Review

• Focused on market share screens in different Focused on market share screens in different demand periods (ex., winter peak, summer off-demand periods (ex., winter peak, summer off-peak)peak)

• Parties offered divestiture package of 2900 MW Parties offered divestiture package of 2900 MW that would reduce the change in concentration that would reduce the change in concentration of the merger within acceptable limits during of the merger within acceptable limits during these periods, within in particular subsets of these periods, within in particular subsets of PJMPJM

• Proposal included 2600 MW of “virtual Proposal included 2600 MW of “virtual divestiture” of nuclear outputdivestiture” of nuclear output– Commitment to pre-sell nuclear output via 15 year contract Commitment to pre-sell nuclear output via 15 year contract

or rolling 3-year contractsor rolling 3-year contracts20

Parties’ FERC Analysis Parties’ FERC Analysis

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Problems With FERC ReviewProblems With FERC Review

• Geographic markets not rigorously definedGeographic markets not rigorously defined• Bands for determining market shares are Bands for determining market shares are

somewhat arbitrarysomewhat arbitrary• Market share is a first step, but should not be the Market share is a first step, but should not be the

end of the analysisend of the analysis• Doesn’t take into account lifespan or other Doesn’t take into account lifespan or other

characteristics of particular units. Specific characteristics of particular units. Specific divestitures undefineddivestitures undefined

• ““Virtual divestiture” may not mitigate incentives as Virtual divestiture” may not mitigate incentives as much as actual divestituremuch as actual divestiture

• DOJ Conclusion: merger with FERC-approved DOJ Conclusion: merger with FERC-approved mitigation would still lead to higher pricesmitigation would still lead to higher prices

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Economic Analysis: Market DefinitionEconomic Analysis: Market Definition

• Product market: Energy at a particular day and time Product market: Energy at a particular day and time of the day. So, in reality, tens of thousands of of the day. So, in reality, tens of thousands of different product markets. Deal with this by different product markets. Deal with this by simulating effects at many different times. If enough simulating effects at many different times. If enough data, all times.data, all times.

• Geographic market: From where can electricity be Geographic market: From where can electricity be drawn to serve customers in the region?drawn to serve customers in the region?– In times of low demand, energy can be pulled from virtually In times of low demand, energy can be pulled from virtually

the entire region, as well as outside the regionthe entire region, as well as outside the region– In high demand, load pockets form, and prices separate in In high demand, load pockets form, and prices separate in

distinct geographic areas via PJM Locational Marginal distinct geographic areas via PJM Locational Marginal Pricing (LMP) system Pricing (LMP) system

– Mapping prices at particular times of day can show relevant Mapping prices at particular times of day can show relevant geographic marketsgeographic markets

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Large Geographic Market in Large Geographic Market in Unconstrained HoursUnconstrained Hours

Source: Public Service Commission of Maryland, Electric Supply Adequacy Report of 2007

Narrow Market in High-Demand Hours Narrow Market in High-Demand Hours with Transmission Constraintswith Transmission Constraints

25Source: Public Service Commission of Maryland, Electric Supply Adequacy Report of 2007Source: Public Service Commission of Maryland, Electric Supply Adequacy Report of 2007

Economic Approaches For Economic Approaches For Determining EffectsDetermining Effects

• Market sharesMarket shares– First step, but limited and flawedFirst step, but limited and flawed

• ““Length analysis”Length analysis”– Less crude than market shares, doesn’t require much Less crude than market shares, doesn’t require much

additional dataadditional data

• Simulation methodsSimulation methods– Bid simulationBid simulation– Residual demandResidual demand– Supply function equilibriumSupply function equilibrium

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Role of Vertical Role of Vertical Integration/Forward ContractingIntegration/Forward Contracting

• Market shares do not take into account Market shares do not take into account downstream commitments by wholesale sellersdownstream commitments by wholesale sellers

• Incentive to raise price in the wholesale market Incentive to raise price in the wholesale market depends on the extent to which firm is a net seller depends on the extent to which firm is a net seller (“long”) or net seller (“short”) in wholesale (“long”) or net seller (“short”) in wholesale marketmarket

• Retail commitments or long-term contracts to Retail commitments or long-term contracts to supply energy can mitigate incentives to raise supply energy can mitigate incentives to raise prices by making a firm shorter in the marketprices by making a firm shorter in the market

• For background, see, e.g., For background, see, e.g., Lien, J. (2000) ‘Forward Lien, J. (2000) ‘Forward Contracts and the Curse of Market Power,’ Contracts and the Curse of Market Power,’ University of Maryland Working Paper.University of Maryland Working Paper.

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““Length Analysis” of MergerLength Analysis” of Merger

• The “length” of a particular firm is the extent to which it The “length” of a particular firm is the extent to which it is a net buyer or seller. A firm with lots of generation is a net buyer or seller. A firm with lots of generation and no downstream commitments is “long,” a net seller.and no downstream commitments is “long,” a net seller.

• Incentive to withhold a particular plant at a particular Incentive to withhold a particular plant at a particular time depends on market price and the owner’s length at time depends on market price and the owner’s length at that time relative to that plantthat time relative to that plant

• A sufficient condition for no harm from a merger is that A sufficient condition for no harm from a merger is that the length behind each asset is reduced post-merger. the length behind each asset is reduced post-merger. Can achieve this with targeted divestitures. Can achieve this with targeted divestitures.

• Even if this sufficient condition isn’t met, can perhaps Even if this sufficient condition isn’t met, can perhaps balance reduced length behind some assets versus balance reduced length behind some assets versus increased length behind others to arrive at no net harmincreased length behind others to arrive at no net harm

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Simulating Effects of Merger: Simulating Effects of Merger: Bid SimulationBid Simulation

• If historical bid data are available, and information about parties’ If historical bid data are available, and information about parties’ downstream and forward commitments, can calculate merging downstream and forward commitments, can calculate merging parties’ optimal withholding strategy had they been merged in parties’ optimal withholding strategy had they been merged in period of examination, holding existing bids constant. period of examination, holding existing bids constant.

• Tricky issues:Tricky issues:– Geographic markets are endogenous (but can approximate based on historical Geographic markets are endogenous (but can approximate based on historical

patterns)patterns)– Comparing simulated future to actual past may not be the right baseline, if Comparing simulated future to actual past may not be the right baseline, if

simulation is only an approximation of actual behaviour. May need to create simulation is only an approximation of actual behaviour. May need to create simulated baseline if pre-merger simulation doesn’t match up with reality.simulated baseline if pre-merger simulation doesn’t match up with reality.

– Doesn’t account for strategic responses by other players in the market after Doesn’t account for strategic responses by other players in the market after the merger. Need to argue that they are too small to be strategic or that the merger. Need to argue that they are too small to be strategic or that ignoring this is conservative. Alternatively, can try to simulate equilibrium of ignoring this is conservative. Alternatively, can try to simulate equilibrium of large players.large players.

• See, e.g., Wolak, F. (2000) ‘An Empirical Analysis of the Impact of See, e.g., Wolak, F. (2000) ‘An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Hedge Contracts on Bidding Behavior in a Competitive Electricity Market’, Market’, International Economic Journal, International Economic Journal, 14(2), 14(2), 1–40.1–40.

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Simulating Effects of Merger: Simulating Effects of Merger: Residual Demand AnalysisResidual Demand Analysis

• Gathering and processing bid data, even when available, can be Gathering and processing bid data, even when available, can be complicated and costly.complicated and costly.

• As an alternative, can assume all firms but merging firms offer As an alternative, can assume all firms but merging firms offer assets at cost before and after merger. Simulate merged firms assets at cost before and after merger. Simulate merged firms optimal withholding pre- and post-merger.optimal withholding pre- and post-merger.– May not be far off if market is relatively unconcentrated. Or, might argue this May not be far off if market is relatively unconcentrated. Or, might argue this

is conservative, if one firm’s withholding leads other firms to withhold further.is conservative, if one firm’s withholding leads other firms to withhold further.

• Examine different demand states and weight based on historical Examine different demand states and weight based on historical frequency. Compare withholding by independent firms pre-frequency. Compare withholding by independent firms pre-merger to combined firm post-merger. merger to combined firm post-merger.

• Complication: Need pre-merger equilibrium concept. Can try Complication: Need pre-merger equilibrium concept. Can try Cournot equilibrium or simply compare to larger of two pre-Cournot equilibrium or simply compare to larger of two pre-merger firms to the post-merger firm.merger firms to the post-merger firm.

• See, e.g., Gilbert and Newberry, “Analytical Screens For See, e.g., Gilbert and Newberry, “Analytical Screens For Electricity Mergers,” (forthcoming, Electricity Mergers,” (forthcoming, Review of Industrial Review of Industrial OrganizationOrganization, 2007), 2007)

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Simulating Effects of Merger: Simulating Effects of Merger: Supply Function EquilibriumSupply Function Equilibrium

• One difficulty with the previous approaches is that they assume One difficulty with the previous approaches is that they assume perfect foresight on the part of firms. Actually, firms can’t perfect foresight on the part of firms. Actually, firms can’t optimize withholding each hour of the day. They bid supply optimize withholding each hour of the day. They bid supply functions, not amount of withholding. functions, not amount of withholding.

• Given some limitations on types of functions that can be bid into Given some limitations on types of functions that can be bid into the market, can in theory calculate of firms’ optimal equilibrium the market, can in theory calculate of firms’ optimal equilibrium supply function bids.supply function bids.

• Need to compare outcome of this procedure to actual outcomes to Need to compare outcome of this procedure to actual outcomes to calibrate model.calibrate model.

• Problem: in practice, supply function equilibrium may have no Problem: in practice, supply function equilibrium may have no solution or multiple solutions. Hard to solve except numerically, solution or multiple solutions. Hard to solve except numerically, and no guarantee iterative procedure will end up with only and no guarantee iterative procedure will end up with only solution.solution.

• See, e.g., Klemperer P. and Meyer M. “Supply Function See, e.g., Klemperer P. and Meyer M. “Supply Function Equilibrium in Oligopoly under Uncertainty,” Equilibrium in Oligopoly under Uncertainty,” EconometricaEconometrica, , 57(6): 1243-77.57(6): 1243-77.

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DOJ Remedy DOJ Remedy

• DOJ remedy went beyond FERC remedy, and called for DOJ remedy went beyond FERC remedy, and called for targeted divestiture of six key plants which included key targeted divestiture of six key plants which included key baseload coal and mid-merit natural gas capacity, along baseload coal and mid-merit natural gas capacity, along with numerous peaking assetswith numerous peaking assets

• Importantly, divestiture allowed parties to retain both sets Importantly, divestiture allowed parties to retain both sets of nuclear plants, a source of potential efficienciesof nuclear plants, a source of potential efficiencies

• Even recent critics of Antitrust Division such as American Even recent critics of Antitrust Division such as American Antitrust Institute hailed the divestiture package as Antitrust Institute hailed the divestiture package as sufficient to mitigate post-market power. Little opposition sufficient to mitigate post-market power. Little opposition by either AAI or interested parties in wake of DOJ filing.by either AAI or interested parties in wake of DOJ filing.

• Merger ultimately withdrawn, however, due to opposition Merger ultimately withdrawn, however, due to opposition from the New Jersey Board of Public Utilities, the only from the New Jersey Board of Public Utilities, the only regulator not to approve mergerregulator not to approve merger

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Final ThoughtsFinal Thoughts

• Market power in electricity markets can be Market power in electricity markets can be particularly easy to exercise, and dangerous for particularly easy to exercise, and dangerous for consumersconsumers

• Market shares, a traditional foundation of merger Market shares, a traditional foundation of merger analysis, not as useful in analyzing electricity analysis, not as useful in analyzing electricity mergersmergers

• Wealth of data relative to some other markets, Wealth of data relative to some other markets, however, may allow more rigorous simulation however, may allow more rigorous simulation methods for calculating merger effectsmethods for calculating merger effects

• Analysis should consider effects of downstream Analysis should consider effects of downstream retail commitments and forward contracts on retail commitments and forward contracts on incentives to withholdincentives to withhold

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Some ReferencesSome References• Armington, E., Emch, E. Heyer, K. (2006), “Year in Review: Economics at Armington, E., Emch, E. Heyer, K. (2006), “Year in Review: Economics at

the Antitrust Division 2005-2006,” the Antitrust Division 2005-2006,” Review of Industrial OrganizationReview of Industrial Organization 29: 29: 305–326305–326

• Bushnell, J., Mansur, E., and Saravia, C. (October, 2007) “Vertical Bushnell, J., Mansur, E., and Saravia, C. (October, 2007) “Vertical Arrangements, Market Structure, and Competition: An Analysis of Arrangements, Market Structure, and Competition: An Analysis of Restructured U.S. Electricity Markets,” NBER Working Paper 13507Restructured U.S. Electricity Markets,” NBER Working Paper 13507

• Gilbert, R. and Newberry, D., “Analytical Screens for Electricity Mergers,” Gilbert, R. and Newberry, D., “Analytical Screens for Electricity Mergers,” forthcoming, forthcoming, Review of Industrial Organization.Review of Industrial Organization.

• Klemperer P. and Meyer M. (1989) “Supply Function Equilibrium in Klemperer P. and Meyer M. (1989) “Supply Function Equilibrium in Oligopoly Under Uncertainty,” Oligopoly Under Uncertainty,” EconometricaEconometrica, 57(6): 1243-77., 57(6): 1243-77.

• Lien, J. (2000) “Forward Contracts and the Curse of Market Power,” Lien, J. (2000) “Forward Contracts and the Curse of Market Power,” University of Maryland Working Paper.University of Maryland Working Paper.

• Wolak, F. (2000) “An Empirical Analysis of the Impact of Hedge Contracts Wolak, F. (2000) “An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market,” on Bidding Behavior in a Competitive Electricity Market,” International International Economic Journal, Economic Journal, 14(2), 14(2), 1–40. 1–40.

• United States v. Exelon Corporation and Public Services Enterprise Group, United States v. Exelon Corporation and Public Services Enterprise Group, Inc.: Inc.: Competitive Impact Statement (available at www. usdoj.gov/atr)Competitive Impact Statement (available at www. usdoj.gov/atr)

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