Electricity Utility Mergers: The Answer or the Question?

Fortnightly Magazine - January 1 1996
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Differences of opinion make for good horse races and bad jokes about economists, and those who are studying the recent wave of electric utility merger announcements have not let us down. Some of these economists optimistically believe that the mergers act as forces for competition, since they will combine corporate assets and staffs to bolster operating efficiency and market acumen at the merged companies. Other economists, who see transmission as the root of monopoly power, are more pessimistic. They expect that a merged system controlling more transmission will end up better able to deny competitive access and thereby harm competition. Most likely, both of these views will turn out to be incorrect or incomplete.

Optimists should note that the announced savings from utility mergers are small, speculative, and often obtainable by less drastic means. Regulation makes it unlikely that a merged system will create a more formidable rival to independent generators, marketers, or telecommunications purveyors. Pessimists should note that the Energy Policy Act of 1992 (EPAct) put important limits on transmission monopoly by empowering the Federal Energy Regulatory Commission (FERC) to issue wheeling orders. Those limits will become more stringent as the FERC gears up to compel utilities of all sizes to file open-access transmission rates.

Neither monopoly nor competition seems to explain the recent merger rush. Combining two large utilities can prove costly, time-consuming, and disruptive. At a time when management should prepare for market developments, a merger diverts its attention to a transaction of little apparent value. In ordinary markets, mergers, acquisitions, and takeovers can be productive, but here they seem otherwise. Utilities that merge may be preparing for politics rather than competition.

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