Merger market power analysis: Pacific Enterprises and Enova Corporation

Abstract

The Pacific Enterprises–Enova (PE–Enova) merger may be viewed as an example of the new breed of gas and power “convergence” mergers. The merger involved the combination of a large gas distribution utility and a contiguous gas and electric utility located in Southern California. As with most mergers, the PE–Enova merger was proposed to federal and state regulators as an opportunity to achieve ratepayer savings. However, the merger also presented an issue of vertical market power involving the substantial electric generation capacity served by Southern California Gas Company (SoCalGas) and its potential impact on electric market prices, and the associated revenues for generation assets owned by San Diego Gas & Electric (SDG&E). In order for the merger to proceed, the approval of at least five separate State and federal regulators would be required. 1 Required approvals include the Department of Justice, the Federal Energy Regulatory Commission, the Securities and Exchange Commission, the California Public Utilities Commission, and the California State Attorney General. 1 Although much of the attention of state regulators, proponents, and intervenors surrounded the division of synergy savings between ratepayers and shareholders, the analysis of the potential for market power abuse was extensive. Intervenors presented numerous complex arguments regarding the potential adverse effects of the merger on competition. In particular, intervenors argued that the combined company would manipulate its storage and transport operations to influence the delivered price of gas to California generators, and therefore, the price of power in the wholesale electric market. The arguments surrounding the existence and impacts of market power in this case are of interest in understanding the nature and complexity of factors that may be considered in evaluating mergers. The proceeding also provides insight into how regulators are grappling with market power issues associated with convergence mergers, and weigh merger costs and benefits.