Historically there have been several tools that did leveled list merging, however today the preferred tool is Wrye Mash or Tes3cmd. E.g., for the example above, the new leveled list would define the list so as to add both 'Blue Hound Dog' and 'Green Hound Dog' to the leveled list. The solution to this problem is to merge the lists from the different active mods into a new mod which is ordered to load last. E.g., if mod alpha adds 'Blue Hound Dog' to the Ascadian Isles creatures list, while mod beta (which loads later) adds 'Green Hound Dog' to the same list, then only the 'Green Hound Dog' creature will show up in game. As with other conflicts, the last mod to load wins, which has the effect of completely removing any additions made by earlier mod.
E.g., almost all creature mods will conflict with each other since creature mods usually add their new creatures into the game world by modifying standard leveled creature lists. Mod conflicts over leveled lists are common. Each item (creature) list is simply a list of items (creatures) and/or other item (creature) lists, along with a specification at what player character level each item (creature) may appear. These leveled lists are defined in the mod files as leveled item lists and leveled creature lists.
Morrowind uses randomized lists throughout the game to both randomize items and encounters and to scale the game to your character's level of competence.