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

The Merger Paradox

More consolidation could trim costs, but some CEOs fear a backlash from regulators.

Fortnightly Magazine - March 2006

Steven H. Davis, chairman of LeBoeuf, Lamb, Greene & MacRae LLP, also speaking at the EXNET conference, painted a very bleak picture of the regulatory climate—at least for utilities.

“To the extent the sector is experiencing substantial price pressures,” he explained, “we are likely to see much more hands-on activity from the state regulators.”

In fact, Davis believes that if prices keep pushing higher, inevitably we will see even more intrusive state regulation. In particular, the battle between utilities and regulators will likely begin the moment when the rate freezes end, allowing utilities to file applications for significant rate increases. And the rate freezes are ending, Davis advises, in a number of states.

“The most extreme example of the kind of controversy,” he adds, has occurred in Illinois, “where there has been tremendous brinkmanship going on between Ameren and Exelon on the one hand, and the governor of Illinois on the other hand, over what happens when that rate freeze ends.”

Davis was struck also by a recent case filed by Arizona Public Service with that state’s utility commission, seeking a $299 million rate hike to offset a dramatic deterioration of financial condition. Also, in January, he noted, Wisconsin Energy won approval for a $200 million rate hike.

The pressure is rising even in Pennsylvania—the poster child for electric competition. Last year, for example, when Pike County (a Con Ed subsidiary) went out and solicited power supply and wound up looking north of a 70 percent increase in prices—the state regulators balked.

The increase in rates “exceeds any electric rate increase allowed by this commission, even when a new nuclear generation station was added to the rate base,” said Pennsylvania Commissioner Bill Shane, in his motion to start an investigation.

LeBoeuf, Lamb’s Davis said that in one of the meetings, a Pennsylvania PUC commissioner was heard saying, “Competitive markets are a useful tool, but not an object of worship.”

The Price of Stability

Beyond cost pressures, there seems to be one last disturbing trend on mergers: an extraordinary absence in vision on what the ideal design and structure of the future utility company and industry should look like. Naturally, this is probably due to the balkanized, hodge-podge nature of the North American utility industry that has so many inherent conflicts and clashing constituencies it’s a wonder that we can find any agreement at all.

But this editor is concerned that even at the federal level the view that hybrid (regulated and unregulated) markets will continue to co-exist has calcified, albeit as a result of the Energy Policy Act of 2005, which essentially preserved the status quo.

Furthermore, if the federal government has backed off from a unified and rational structure (or finding one) for the industry, then we may never hope to see the benefits that other industries have enjoyed from consolidation. The reason is that without a coherent structure, we are likely to see distorted merger proposals that seek to appease regulators but fail to make economic sense.

FERC Chairman Joseph Kelliher, while he may have been called a reformer, indicates