Reports

The Potential Exercise of Market Power by the Proposed Merger of Two Utilities in the Midwest Interconnect

Abstract

The 1999 investigation of the merger between Western Resources, Inc. and Kansas City Power & Light Company, two Midwest utilities, is a fine example of a contentious antitrust issue in restructured electricity markets: the measurement of market power potentially exercised by merged utilities. The challenges are formidable. The relevant geographic market changes hourly in the face of transmission congestion. Traditional measures of market power, such as the Hirshman-Herfindahl Index, are inappropriate. The simplistic application of standard economic models, such as a Cournot with a competitive fringe, has an unhealthy bias in favor of finding market power. A proper analysis of whether or not the merged entity lacks market power has to include a rigorous model of the interconnected transmission systems in and around the Midwest, their corresponding locational and temporal markets, as well as the technical and commercial factors influencing price discovery. UPLAN, a proprietary engineering economy model of the North American power system, is deployed in a simulation of the Midwest Interconnect in order to assist in an evaluation of the potential exercise of market power by the merged utilities. UPLAN simulations reveal that strategic bidding by the merged entity augments profits over a significant period of time, and that meaningful measures of post-merger concentration indicate a weakening of competition. In an attempt to win regulatory support for the merger, the merging parties, over the course of the proceedings, granted several concessions related to market power. The merger plan was eventually terminated not by regulatory action but by KCPL for purely private reasons.