Regulation of Networks when Networks Cross Political Borders

Michael Giberson

The New Jersey experience illustrates one other key insight into regulation of a network. In a network industry such as electricity, where the network extends across state lines, it is possible for one state to exert significance externalities on others. The siting of transmission lines or an electricity generator in one state can alter supply conditions in other states. Moreover, if transmission is natural monopoly, one has to decide how to pay for it. Attempts by one state to pay less could increase the burden on other states. It is not obvious that the optimal geographic scope for unified regulation necessarily follows state or country boundaries.

That’s from “Mergers in Regulated Industries: Electricity,” by Dennis Carlton of the University of Chicago, currently serving as the Deputy Assistant Attorney General for Economic Analysis. As the title of the paper indicates, the subject is primarily merger analysis in electric power markets. Carlton uses the abandoned merger between Exelon and PSEG for illustrative purposes. The “New Jersey experience” he refers to is the inability of the merging companies to sufficiently satisfy regulatory demands made by the state.

While a now-abandoned merger proposal may in itself be of little interest, the more general issue of mergers in network industries remains important. What’s more, the question of appropriate policy for networks crossing political borders will only become more important as the efficient size of networks grows larger and larger.

(HT to the Antitrust & Competition Policy Blog.)