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Consolidation: Key to the Future?

Why integration may win out in the long run.

Fortnightly Magazine - August 2005

principles have been turned on their head: Concentration of ownership is acceptable only if there is enough geographic disaggregation to allow vigorous competition. Workable competition presumably is the dominant value, and, reversing the priorities of PUHCA, integration is not an object of government policy, although it may be a goal of private decision making. Presumably, consolidation would be permitted only if it does not interfere with competition. These are the priorities of the economy generally, and they seem to apply equally to electric power. Thus, the merger of oil companies or chain stores will be permitted only to the extent that competition can be maintained. Those steeped in the lore of antitrust could hardly admit of any other priorities.

Yet, I suspect that the lure of integration of electric power generation will, in the end, prove more powerful even than the demands of competition. This may reflect a resurgence of economies-of-scale thinking, since the kind of thinking that formed PUHCA, and its preference for integration, is intuitively powerful and will continue to assert itself. It also may be that this thinking is empirically sound. Integration of a network infrastructure industry, like electric power generation, may indeed yield lower prices (with more reliable operation) than can be achieved by a disaggregated system. In the meantime, competition has yet to produce consistently lower prices, and certainly has not produced superior reliability.

Integration also is more likely to accommodate the expanded use of nuclear generation that appears to be in our future. Nuclear power may well be poised for a comeback because of the very serious problems of fossil fuels with respect to climate change, and better management of nuclear is part of the rationale for the merger of Public Service Electric & Gas into Exelon. The numerous uncoordinated managements and engineering professionals that attempted to install nuclear power may have led to its earlier failure in the United States, while the high level of expertise available only to a very large organization, and the uniformity of approach achievable on that basis, may lead to results in this country comparable with those apparently realized in France and Japan.

Reliability is another factor in support of integration. Almost by definition, interconnected systems with centralized control are most likely to foresee and to deal with stresses leading to failures and to cascading outages. One of the unknown qualities in a system of competition, with fragmented ownership and control of transmission, is the state of reliability. Such a system is experiencing enhanced power flows over longer distances, creating conditions unfavorable to reliability. And various parts of the system stand in competitive rather than cooperative relation to one another. This problem has not been thought through under the present condition, and the solution seems to be more one of hope than of realistic expectation.

Beset by Challenges

In addition, consolidated systems may be able to deal more effectively with the mounting environmental problems facing the industry. From greenhouse gases to mercury pollution, the industry is beset with emissions challenges probably more serious and difficult than at any time in