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Do Utility Mergers Deliver?

Not in all cases, or for all stakeholders. Here’s why.

Fortnightly Magazine - June 2006

their employer. Nonetheless, the record of headcount reductions within our sample group suggests there will be an overall outflow of employment in the U.S. utilities sector as consolidation continues.

Impacts on Customers

When one cuts through the mounds of filings on proposed mergers at the Federal Energy Regulatory Commission (FERC) and state commissions, the ultimate question being addressed is: How will it impact electric consumers? From the FERC market-power test to the public interest test at the public utility commission, this is the central question. FERC is most concerned with the impacts on competition and transmission, reinforced by the underlying policy position that competitive wholesale markets ultimately will benefit consumers. State commissions are concerned with preservation of regulatory authority, merger savings for the benefit of customers, maintenance of service quality, local utility presence, and progress toward state-specific policy goals, such as low-income assistance or renewables development.

Merger approvals by state commissions often are preconditioned on the promise of cost, or “synergy savings” to be passed along to consumers. This is a relatively narrow lens through which to view a merger, but it offers tangible evidence of a short-run benefit. In reality, the tools we have to measure consumer impacts are challenged by the complexity of the industry. One would expect that over time, economies of scale and operational best practices would deliver long-term benefits.

Figure 3 illustrates the annual merger-related synergy savings for the specifically affected utility subsidiaries. These savings are reported in the merger filings, approval orders, or SEC filings for the companies. We are expressing savings on a per-customer basis for cross-company comparisons. Five of the six companies committed to specific savings levels over time. 1 At the upper end of this range was Energy East, committing to rate reductions of $164.3 million annually, equivalent to $137 per customer. In close proximity, Exelon committed to a $200 million annual rate reduction for PECO customers, equivalent to $133 per customer. AEP committed to $84.4 million in annual savings for CSW, equivalent to $50 per customer. At the lower end of the spectrum, Xcel Energy and Progress Energy committed to customer savings of less than $10 per customer, while Sierra Pacific Resources made no specific rate-reduction commitments. 2

With the exception of savings levels committed to by Energy East or Exelon, these savings are quite modest in contrast to a typical customer’s annual bill. These numbers suggest that while customers may see some direct rate savings negotiated from the regulatory approval process, this generally is not a compelling case alone for a merger from a customer perspective.

Are there other benefits for consumers? At the regulatory altar, merging companies will commit to programs for the benefit of consumers and the region. Concessions in these six mergers included rate freezes, rate caps, generation divestitures, expansion of low-income assistance programs, environmental improvements, service-quality commitments, and economic-development funding.

Recently closed and pending mergers include substantial rate concessions to attain commission approval. Duke conceded to a $117 million cut for its North Carolina customers, while Cinergy provided a $40 million credit for Indianans. Substantial merger-linked concessions