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Management: Merge,. Divest, or Both?

Fortnightly Magazine - June 1 1996

Working Group in California.

s Merger Magic

"Just take our merger, for example. I think there's signifi-cant evidence that mergers produce efficiencies in the operation, and that the benefits of combining two companies is to the

benefit of both consumers and investors. For instance, in 1995, our earnings increased roughly 17 percent over 1994. The primary reason . . . was because of the nonfuel operation and maintenance savings we had. So we realized about $42 million in savings . . . by combining the two companies.

"Look at the seven mergers announced in 1995. They estimate there would be roughly $6.5 billion in savings over 10 years.

"The reason we exceeded our targeted savings amount is that we found all kinds of good surprises. One company would do one thing one way and another way. We were able to combine these and come up with more efficient ways to do things."

s Debt Service

"I don't think that mergers raise the capital costs of generation. With respect to a divestiture, I think the cap structure for a pure generation company would be different. There would be greater equity, so the cost of capital for a pure generation company could be higher. . . . But the question is, What is financed? Are the assets financed, or are the underlying contracts for those assets financed?

"The issue to me is that it's not clear that the cost of capital for a pure generation company would be higher. If you had greater equity, you would intuitively believe it would be. But then look at IPPs, with their debt equity, which is really financing off the contract."

s Hard Numbers

"I think we're going to end up with 10 to 15 national generating companies.

"The number of transmission companies is more difficult to see. As you see ISOs develop in different regions, we may end up with a national ISO, rather than just a regional one. . . . It's an open question as to how that unfolds."

s Disaggregation

(Long silence.) "I'm having a little difficulty understanding what 'unbridled market power' is. But that question sort of presumes that somehow you have market power. . . . It's a biased question. I would quarrel with the notion that you'd have unbridled market power. I don't think that would happen. I don't think you have, today, with natural gas being deregulated, unbridled market power in natural gas. That's a $30-billion market. The commodity market for electricity is a $90-billion market. I do not believe that you're going to have that concentration of market power. That would be detrimental to the efficient operation of the market." t

James E. Rogers is vice chairman, president, and CEO of Cinergy Corp., the holding company of PSI Energy, Inc. and the Cincinnati Gas & Electric Co. The utility serves nearly 2 million customers in Indiana, Ohio, and Kentucky, and is the 13th largest investor-owned utility in the United States, based on generating capacity. Rogers's many previous posts include work as an assistant to the chief trial counsel at