In the gas and electric industries, deregulation began in the early 1990's. For electric utilities, New England was the first region to restructure utilities and create an independent wholesale market. California followed and faltered. MidAtlantic learned from New England and California and they created the most sophisticated wholesale power market in the nation. The MidAtlantic market was called PJM, which referenced their Pennsylvania, Jersey, and Maryland footprint. Over the years, PJM's territory expanded to serve parts of North Carolina, Virginia, Maryland, Deleware, New Jersey, Pennsylvania, Michigan, Ohio, Kentucky, Indiana, and Illinois.

Since the 1990's, new markets formed, old marketed expanded and new players emerged. In addition, physical trading was replaced by financial trading.

The transition from physical to financial created new opportunities for the financial community. Trades have become complex, sophisticated, and fascinating. Some of the most impressive shops create financial packages that combine transmission rights, fuel options, generation assets, and power (one of the nation's most sophisticated operations is owned by Exelon). The result is big players can profit by delivering bulk power at prices below generating costs.

Up to now, federal regulation in this space has been relatively light. One area where federal regulators intrude is market power abuses. After the Enron debacle, regulators have been motivated to monitor markets to assure that no single entity can influence or control a market.

One example is Duke. Some may recall that the Federal Energy Regulatory Commission (FERC) delayed Duke Energy's acquisition of Progress Energy over the issue of market power. The FERC believed that unless there were changes, the combined utilities could dominate and control prices paid by small utilities.

In recent times, market power concerns continue as new players emerge and grow. New players have grown through acquisitions and mergers into large holding companies. Previously small utilities are now part of huge holding companies, which are largely unknown to most Americans.

One such utility has become so large that the FERC has developed concerned about their "horizontal and vertical market power" in the Western United States Concerns have reached a point where the FERC is in the process of revoking the company's authority to sell their power into the wholesale markets.

That large utility holding company is Berkshire Hathaway. You can bet they are reconsidering every option possible to resolve FERC's concerns.

For more, see Law360.


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