The Larger, the Better
In recent years, increased competition and the threat of deregulation have spurred numerous mergers and acquisitions. Fourteen mergers have been completed by investor-owned utilities (IOUs) over the last five years; seven more have been announced. If all of these mergers receive approval, nearly 20 percent of the IOUs that existed in 1990 will no longer exist.
These mergers have consolidated generation resources into fewer hands, raising the possibility that sellers will be able to keep prices profitably above competitive levels for a significant period of time (em that is, to exert market power. In states where regulators and policymakers are considering deregulation, abuse of market power is a great concern. For example, in its December 20, 1995, order on restructuring, the California Public Utilities Commission ordered Pacific Gas & Electric Co. (PG&E) and Southern California Edison Co. (SCE) to voluntarily divest themselves of 50 percent of their fossil generating assets. As more and more jurisdictions consider restructuring, it becomes increasingly important that proper techniques are used to gauge the degree to which market power may exist.