Financial News

Fortnightly Magazine - June 15 1996
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In April, Texas Utilities announced that it would buy ENSERCH, Western Resources launched a hostile takeover bid for Kansas City Power & Light, and The Southern Co. initiated its ultimately futile bid for the United Kingdom's National Power. Eight other pending mergers involving major electric utilities have been announced during the last year. Utility managements clearly believe their future success requires merging with other utilities. The benefits for shareholders, however, are less obvious.

Shareholder benefits depend on the extent to which mergers enhance earning power, but restructuring casts a cloak of uncertainty over future earnings. It also requires a new framework for analyzing utility mergers that makes specific assumptions about the new structure of the industry.

Fortunately, the forces driving the restructuring process are obvious enough to allow a reasonably accurate projection of that structure. Technological and economic forces are making competition possible over a broad segment of the electric industry, and regulators and legislators are groping toward policies that will promote competition wherever feasible.

Future Industry Structure

We can assume that competition will be fostered wherever services can be provided by competing suppliers. Where competition is not practicable and strong natural monopoly elements are present, services will be provided by a regulated natural monopoly, much as they are under the current monopoly franchise system. Where competition is promoted, policymakers will ensure that market power is sufficiently constrained to allow competition to flourish. Such constraint will include actions to prevent utilities from using their natural monopoly activities to gain marketing advantages.

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