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Electricity Utility Mergers: The Answer or the Question?

Fortnightly Magazine - January 1 1996

add another expensive barrier.

Restrictions posed by the Public Utility Holding Company Act (PUHCA) further restrict competition for the control of electric systems. For all practical purposes, PUHCA limits a utility's potential merger partners to adjacent utilities or systems that can be reached by short transmission links. Acquisition of a utility by a nonutility seems unlikely, since doing so will trigger additional regulation of the acquirer's nonutility operations and finance. If Congress repeals or amends PUHCA, utilities may find it difficult to justify the current crop of mergers to shareholders. The utility that waits another year or two may gain important new choices without losing many of the old ones.

Unlike an ordinary corporation, an electric utility does not face a world of potential takeover artists who might impose radical change. Instead, only a few nearby entities in the same business can seriously think about merger or acquisition. It is little wonder that most utility mergers are "friendly," since they take place between long-time neighbors whose past has seldom been competitive. (PECO recently abandoned the only unfriendly transaction in the current crop (em its attempted acquisition of Pennsylvania Power and Light.) The friendliness of most mergers leads to concerns far removed from competition. Writing in The Electricity Journal (Oct. 1995, p. 11), utility merger attorney Douglas Hawes stated that the most important obstacle to a merger of "equal" utilities "is the difficulty of devising a succession plan that satisfies both the two CEOs and their respective boards." Recently consummated mergers have "all involved a contractually blessed plan of one CEO serving as CEO of the combined enterprise for a limited time, to be followed by the other CEO." Facing a maelstrom of retail wheeling and strandings that threaten billions in assets, utilities are choosing merger partners by the ages of their CEOs.

DO MERGERS MATTER?

Economic reasoning usually starts from a presumption that people are self-interested and pursue their interests as best they can. The owners of a business might do so by reshaping it into a better competitor, or possibly a better monopolist. Many of today's utility mergers, however, seem destined to do neither. One possibility remains.

Mergers or none, the future of the industry will be determined both by markets and by politics. Utilities with heavy stranding exposures or competitively aggressive neighbors may find it better to depend on politics than on markets to ensure their continued corporate existence. CEO James Rogers of CINergy Corp. recently stressed this proactive aspect of electric mergers, saying that they will produce "companies that are big enough to mold and shape future regulatory and legislative issues." (Inside FERC's Gas Market Report, Sept. 22, 1995) If Rogers is correct, then what merged utilities cannot get from customers with choices they will attempt to get from governments that restrict those choices.

More optimistically, even politics may not do much for the newly merged systems. A larger utility is both a better fortress and an easier target. Politically, small municipal and cooperative systems have more than held their own, while companies the size of the Long Island