Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Deregulation and Mergers: Is Consolidation Inevitable?

Fortnightly Magazine - October 15 1996

merger will provoke one of the Eastern roads to merge with a Western road, thereby creating a railroad of unprecedented size and power. Of course, the railroad industry can claim dramatic cost reductions as a result of consolidation, track abandonment, and crew reduction. But the point is that the structure of both railroads and airlines has changed drastically from its previous regulated form.

Perhaps the structure of power generation in the long run will come to resemble that of the railroads: three Eastern and two Western. Or it might be like that of the airlines: three majors; a few of middling size, like Northwest; and a larger number of startups. But there is no particular reason why, especially given competitive considerations, it should resemble either the railroads or the airlines, or any other existing model for that matter.14

That being the case, the first question is whether the Federal Energy Regulatory Commission (FERC) can accurately forecast what sort of structure will eventually emerge in the electric generating business. I am afraid the answer to that has got to be "No." So the process of evaluating proposed mergers will have to be tentative, leaving as much room as possible for adjustment and correction as the process goes forward.

The next question appears inescapable: Is consolidation inevitable in an electric power generation industry that is moving from regulation to deregulation and competition? And is it just possible that an electric industry that achieves a degree of consolidation will prove more efficient and stable than one that remains widely fragmented?15

The Drive for Efficiency

Might a utility seek a merger for reasons other than a desire for market power? The obvious and most frequently invoked reason will be economies of scale and scope. These benefits have been debated elsewhere, and the point has often been made that many of the same economies could be realized without merger.16 The point has also been made that economies of coordination will flow from the PoolCo model of deregulation (now generally favored over the bilateral model) without need for merger.

Another possible reason, less often discussed, may be the capability for improved planning. The existence of excess capacity in a very capital-intensive industry is a serious economic problem, as is illustrated, for example, by the experience of the railroad industry. Much of the persistent drive of the railroads for consolidation springs from their enduring concern about excess capacity, which has been with them since the Depression. The advent and growth of motor carriers, barges, airplanes, and of course, private automobiles left the railroads with a great deal of capacity that they did not need, and apparently only recently have they succeeded in bringing it under control. With five major railroads left in the country, it must be easier for the survivors to plan the development of their facilities than it was before the consolidation took place. The same principle applies to electric generation. Given the huge sums required for generating plants, concern focuses on building too much and being able to participate only on peak or to recover no