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M&A for T&D
Grid system operators now hold the cards. That means a bidding war for talent and a new wave of mergers.
TBy issuing new rules for a Standard Market Design (SMD) for wholesale power, the Federal Energy Regulatory Commission (FERC) in all likelihood will usher in a new wave of utility mergers. But the pattern will differ from what we have seen in recent years.
The deals will center on the transmission sector, and take a horizontal shape, rather than vertical.
That's because the SMD will recast the value chain for the utility industry making the RTO (regional transmission organization) and the ITP (independent transmission provider) the Master of Ceremonies. It will create a war for talent among grid operators. It will convert transmission system operation into the engine that creates value in wholesale markets for energy and capacity.
At the same time, however, the outlook for utility deregulation at the retail level appears much less promising. The political backlash from California's failed experiment with electric competition, as well as the Enron scandal, leads regulators in other states to question the value of retail deregulation.
Yet this dichotomy between retail and wholesale deregulation will only reinforce my prediction of a new merger wave.
On one hand, FERC wants to promote price discovery and unfettered open access where the transmission owner and/or operator do not face energy price risk. Yet on the other, many state regulators do not trust wholesale competition to result in low or consistent prices to bundled customers, nor to result in adequate capacity reserves for system reliability.
This growing disconnect soon will encourage utilities to choose whether to remain in an integrated business regulated by two jurisdictions, or to become one of three types of a "pure play" energy business: a distribution business controlled by state public utility commissions (PUCs), a transmission-only business, or unregulated generation and other services business.
In fact, the philosophical differences between the separate regulatory jurisdictions for transmission (federal) and distribution (state) are diverging to the point that makes it difficult for companies to strike regulatory compacts that fit a consistent and focused corporate vision. The new rules make it clear that integrated utilities will need to be passive common carriers while being cost-effective providers of bundled services. Utilities have dealt with different compacts in the past, one struck with FERC, and others reached with one or more state regulators. Still, utilities in PJM and NY ISO, models for FERC's proposed rules, have had a higher propensity to merge than utilities in other regions.1 With the advent of successful independent transmission companies, transmission asset owners will soon have the opportunity to divest those assets at a reasonable return to investors, while consolidating distribution and retail services. Of course, the new FERC rules will not alter global competition for customers, markets, and resources. They will not change the fact that the utility industry is technologically mature and must learn how to survive in the information age. The pressures on companies to deal with these threats by consolidating through mergers will continue. Yet the FERC rules certainly will