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Gas-Electric Mergers: Money Well Spent?

Fortnightly Magazine - March 1 2000

You do it in a way which creates the most economic value for you and your customer."

Deregulation?

Sometimes A Hindrance

At Robertson Stephens, Hugh Holman believes deregulation handicaps regulated utilities that are moving to competition. He's convinced that the retail energy marketers - the Enrons and Dynegys - will take market share from incumbents because they don't suffer from the handicap of the deregulation process.

"It seems that if you are a utility, the challenges you face are almost overwhelming, from the task of having to deal with regulators to the task of negotiating in the states in which you do business," he says.

Holman estimates that the organizational change required of incumbent utilities could take three to five years. For example, according to Holman, the CEO of AES estimates that transforming the company's recent acquisition, Cilcorp, into an AES company will take three to five years. "This is the period of time where newcomers are in a great position to capture market share from the incumbents," Holman adds.

Similarly, Duke Energy's Richard Priory believes his company would be five years behind the competition if it weren't for the PanEnergy acquisition having occurred in 1997.

Holman continues, "From my work in telecommunications and airlines, if you go back and look at the stock price performance of the companies that are in those businesses, the last place you want to be putting your money to work is with the incumbents.

"They do not generally fare well in deregulation and, by definition, a regulated monopoly is going to lose market share. It doesn't mean they are going to lose money, but they are on the defensive rather than the offensive," Holman says.

That is the lesson Enron learned when it bought utility Portland General Electric, according to Stephen Bergstrom, president and chief operating officer at Dynegy.

"The biggest difference between our merger with Illinova for $7.5 billion and Enron's purchase of Portland General Electric is that Illinova was further along in its restructuring effort," he says. "Enron had to deal with a public service commission to accomplish what we [had] already accomplished with Illinois Power."

Bergstrom adds, "[With] Illinova, they had already gotten an agreement from the commission to spin their generation off; they had already gotten their rates frozen until 2004. Any cost reductions that we get out of the transaction all falls to our bottom line."

Commission approval of Dynegy's merger with Illinova, explains Bergstrom, was nothing more than a rubber stamp. The regulators had no ability to reopen the deal.

"We did not have to go in and negotiate with the commission. That is what is holding up most of these mergers ¼ the state commissions are extracting some of the value.

Bergstrom says Dynegy was able to progress beyond what Enron was able to do, although he believes that Enron would benefit more if it were to buy PGE today.

Some details, however, remain for Dynegy to iron out with the Illinois Commerce Commission.

"We hope to work a deal out with the commission to where we can put