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• On June 22, the Antitrust Division entered into a consent decree with Exelon Corporation and Public Service Enterprise Group ("PSEG"), requiring Exelon to divest certain power plants in New Jersey and Eastern Pennsylvania as a condition merging with PSEG.  According to the complaint, the combined company would have controlled up to 49% of the wholesale electricity market in New Jersey and Eastern Pennsylvania.  In doing so, the Division focused upon transitory geographic markets in "constrained areas" rather than on the geographic markets that are usually served by the distributors.

The Division defined the geographic market as two areas within the control of PJM Interconnection, which controls the transmission grid for the mid-Atlantic region of the United States.  Although usually distributors of electricity are able to buy electricity from any generator within the PJM area, during times when transmission capacity is constrained, the distributors must buy from more local sources within what is known as the "constrained area."  Thus, while normally distributors will purchase electricity from lower per unit costs generators, such as nuclear and larger coal power plants, during times of constrained transmission capacity, the distributors will purchase from higher per unit cost generators, such as oil and gas generators.

 

The Division determined that in two constrained areas, PJM East and PJM Central/East, the combined firm would have 49% and 40% of the combined generating capacity, respectively.  PJM East becomes a constrained area when the transmission is constrained into the Eastern Interface, an area encompassing Philadelphia and New Jersey, while PJM Central/East is a constrained area when the transmission capacity of 5004 and 5005 Transmission lines are limited.  PJM/Central East encompasses central Pennsylvania, along with the areas of PJM East.

 

In addition to the market shares that the combined company would control, the Division also noted that the company would have a variety of power plants to choose from when deciding how to meet electricity demand.  The Division worried that the combined company would decrease its output at its more-efficient plants or raise its prices at its middle-efficiency plants, forcing the distributors to buy output from higher cost generators if the area became constrained.  "By reducing its output, Exelon could force PJM to turn to more expensive units to meet demand, resulting in higher clearing prices in PJM East and PJM Central/East."  To decrease the anticompetitive effects of the merger, the Division forced the companies to divest 5,600 megawatts of generating capacity in New Jersey and Pennsylvania, out of 40,000 megawatts of total generating capacity. 

The decision highlights the complexity of judging mergers in non-traditional markets, as the division did not focus on the total output of the normal area, but instead on areas that are cut off from other sources when transmission capacity is limited.  In addition, the decision might also reflect recent political pressure to watch energy mergers more closely.  The Division's future merger decisions will be watched to see if the "constrained area" analysis is used in other areas.