[BETA] Fortnightly

Converging Markets:

The First REAL Electric/Gas MergerEnron's bid

to acquire Portland General heralds a new phase

in utility competition.

Why the Holding Company Act doesn't matter.

By Charles M. Studness

The merger agreement between Enron and Portland General Corp. has reshuffled the electric restructuring deck. It makes electric utilities takeover targets for outside suitors after 60 years of peaceful immunity. It drives home the fact that electric utilities will be thrust squarely into the zero-sum game of head-to-head competition. It demonstrates that market forces will limit the ability of regulators to control restructuring. It brings the convergence of gas and electric markets to center stage.

Enron's proposed acquisition of Portland General appears surprising only in its timing. Since 1935, the Public Utility Holding Company Act (PUHCA) has effectively given electric utilities immunity to takeovers by outsiders. Its requirements have proven sufficiently onerous that no private corporation outside the utility industry has been willing to acquire a utility and fall subject to jurisdiction under the Act.

Enron apparently expects that PUHCA will have been repealed by the time it completes its acquisition of Portland General, since it is probably no more willing to be saddled with PUHCA than anyone else.

Without the protection afforded by the Holding Company Act, an electric utility should prove as likely a target for a takeover as any other company. In this case, Enron has simply anticipated repeal instead of waiting for it to occur. Now that Enron has made its preemptive strike, others can be expected to follow.

Competition Turned Aggressive

The proposed merger makes it clear that head-to-head competition will form a key component of the restructured electric industry. Given Enron's aggressive bulk-power marketing activity and Portland General's strategic location between the low-cost hydropower region of the Pacific Northwest and the huge California market, Enron obviously intends to compete vigorously for customers and sales.

No company that expects to participate in the California market can continue to view competition as a controlled process. Instead, competition means aggressive companies invading markets wherever prices are too high or service invites improvement. Success for invaders and incumbents alike will involve price, service, and marketing (em not just cutting costs to meet competition kept under control by regulators.

While the impetus for reform lies grounded in technological change, the transition thus far has proceeded under the comfortable control and guidance of regulators. Enron's prospective entry into the electric business underscores the fact that market forces have a life of their own. Regulators will undoubtedly exert less and less control over the transition as time progresses. As Enron and others press their case, regulators and legislators will find it increasingly difficult to deny customers access to competitive prices.

A Nationwide Market

The proposed combination of Enron and Portland General also appears likely to accelerate the convergence of the electric and gas markets into a broader energy market. The proposed merger furthers Enron's goal of becoming a national energy company in the production and marketing of gas and electricity. The merger will give Enron the physical electric generation capability it needs to